Lawsuit!: Reducing the Risk of Product Liability for Manufacturers

Lawsuit!

Lawsuit! Reducing the Risk of Product Liability for Manufacturers

Randall L. Goodden

Copyright # 2009 by John Wiley & Sons, Inc. All rights reserved. Published by John Wiley & Sons, Inc., Hoboken, New Jersey Published simultaneously in Canada No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning, or otherwise, except as permitted under Section 107 or 108 of the 1976 United States Copyright Act, without either the prior written permission of the Publisher, or authorization through payment of the appropriate per-copy fee to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4470, or on the web at www.copyright.com. Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 111 River Street, Hoboken, NJ 07030, (201) 748-6011, fax (201) 748-6008, or online at http://www.wiley.com/go/permission. Limit of Liability/Disclaimer of Warranty: While the publisher and author have used their best efforts in preparing this book, they make no representations or warranties with respect to the accuracy or completeness of the contents of this book and specifically disclaim any implied warranties of merchantability or fitness for a particular purpose. No warranty may be created or extended by sales representatives or written sales materials. The advice and strategies contained herein may not be suitable for your situation. You should consult with a professional where appropriate. Neither the publisher nor author shall be liable for any loss of profit or any other commercial damages, including but not limited to special, incidental, consequential, or other damages. For general information on our other products and services or for technical support, please contact our Customer Care Department within the United States at (800) 762-2974, outside the United States at (317) 572-3993 or fax (317) 572-4002. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic formats. For more information about Wiley products, visit our web site at www.wiley.com. Library of Congress Cataloging-in-Publication Data: Goodden, Randall L., 1951Lawsuit! : reducing the risk of product liability for manufacturers / Randall L. Goodden. p. cm. Includes index. ISBN 978-0-470-17797-6 (cloth) 1. Products liability--United States. 2. Industrialists--United States--Handbooks, manuals, etc. I. Title. KF1296.G66 2009 346.73030 8--dc22 2008038636 Printed in the United States of America 10 9

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To My Wife and Best Friend Peggy

Contents

Preface

xiii

Acknowledgments 1. An Introduction to Products Liability

xv 1

Courts and Jury Perceptions / 4 Judicial Hellholes / 5 Legal Reform / 7 Impact on Manufacturers / 8 Public Perception of Corporations / 10 Product Liability from the Insurance Perspective / 15 Insurance Companies Supporting PLP Programs / 18 Recommendations that Can Be Used on Products Liability Accounts Related to Design, Advertising, Instructions, and Product Recall / 20 1.9 Tougher Requirements from the CPSC / 22 1.10 #1 Verdict of 1999: $4.9 Billion Against GM for Gas-Tank Explosion—Live Defense Demonstration Backfires and Turns the Tide / 26

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8

2. Product Liability Around the World 2.1 2.2

35

United States / 38 Australia / 50 vii

viii

CONTENTS

2.3 2.4 2.5 2.6 2.7

Canada / 59 China / 67 Europe: Part 1 / 71 Europe: Part 2 / 76 Japan / 83

3. Product Liability Law 3.1 3.2

93

Restatement Third of Torts / 94 Commonly Used Terms and Definitions / 98

4. New Product Introduction: More Effective Design Reviews

115

4.1

The Different Stages or Types of Design Reviews / 122 4.2 Creating the Design Review Team / 123 4.3 Making Design Reviews the Policy / 125 4.4 Developing the Design Review Procedure / 127 4.5 Minutes of the Design Review / 131 4.6 Policies and Procedures—Assets and Liabilities / 131 4.7 Engineering Change Control / 132 4.8 Traceability and Recall Preparedness / 133 4.9 Measuring the Effectiveness of the Design Review Team / 134 4.10 In Conclusion / 134 5. New Product Introduction: Product Safety Reviews Hazards Analysis, and Risk Assessment 5.1 5.2 5.3 5.4 5.5 5.6 5.7

Creating the Product Safety Team / 136 Elements of the Hazards Analysis / 137 Design Review—a Viewpoint of the Consumer Product Safety Commission (CPSC) / 138 Failure Mode and Effects Analysis (FMEA) / 139 Cause-and-Effect Diagram / 142 MIL-STD 882 / 143 Hazards Analysis Software / 148

6. Product Testing 6.1 6.2 6.3

135

The Initial Design Process / 150 Conducting Product Tests / 150 Building a Testing Lab / 151

149

CONTENTS

6.4 6.5

Complying with Domestic or International Standards / 154 Testing Products and Reacting to Test Results / 154

7. Warnings and Instructions 7.1 7.2 7.3 7.4 7.5

8.2 8.3 8.4 8.5 8.6

201

Deceptive Advertising v. Defects in Marketing / 204

10. Contracts, Purchase Orders, and Agreements 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8

179

Examples of Warranty, Warranty Disclaimer, and Exclusive Remedy / 180 Limitation of Liability / 180 A Businessperson’s Guide to Federal Warranty Law (http://www.ftc.gov) / 181 Offering Service Contracts / 199 Statement of Terms and Conditions / 200 Disclaimer or Limitation of Implied Warranties / 200

9. Product Marketing 9.1

157

The Legal Duty to Warn / 158 Presumption / 159 No Need to Warn Sophisticated Users / 160 The 2007 ANSI Z535.4 Standard for Product Safety Signs and Labels / 161 The New Standard: ANSI Z535.6 / 173

8. Product Warranties 8.1

ix

207

Lack of Supplier Control / 208 Guilty by Association / 209 Purchase Orders / 210 Recall Considerations / 212 Distribution of the Purchase Order Terms and Conditions / 212 Customer Contracts / 213 The China Syndrome / 215 Restructuring Import Contracts When Importing Goods from China / 216

11. Records Retention and Dangerous Documents 11.1 Records Retention Programs / 228 11.2 Hard Copy Storage / 229

227

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CONTENTS

11.3 Records can be Key for Defense / 231 11.4 Document Management and Recognizing “Dangerous Documents” / 233 11.5 Electronic Documents and Discovery / 239 11.6 The New e-Discovery Burden / 240 11.7 Employee Education / 242 12. The Administrative Team 12.1 12.2 12.3 12.4 12.5 12.6 12.7 12.8 12.9

243

Selecting a Primary Driver / 244 Creating the Administrative Team / 245 Gaining the Necessary Knowledge / 246 Announcements to the Rest of the Organization / 246 Selecting an Outside At torney / 247 Auditing the Operation / 247 Developing an Implementation Plan / 252 Administrative Team Meetings / 253 Executive Action—a View from the CPSC / 254

13. Post Sale Duties to Warn and Recalls

257

Estimating the Economic Impact of Product Recalls / 260 “Made in China” Recalls of 2007 / 260 Implementing a Recall / 262 Developing a Procedure / 263 The Tylenol Recall / 266 Government Agencies Involved with Certain Product Recalls / 267 13.7 EU Recall Planning Guide / 288 13.8 Some Final Thoughts on Recall Prevention / 297

13.1 13.2 13.3 13.4 13.5 13.6

14. The Quality System: Incorporating Safeguards into the Procedures 14.1 14.2 14.3 14.4 14.5 14.6 14.7

The Legal Focus on Quality / 301 How Quality Can Become a Liability / 301 The PLP Problem with Quality Programs / 302 Evaluating the Quality Program / 304 Incorporating PSLP into the Quality Program / 305 Product Safety and Quality Guidelines by the CPSC / 307 Product Safety Policy / 307

299

CONTENTS

xi

14.8 Organization / 307 14.9 Training / 307 14.10 Technical Guidance / 308 15. Claims and Investigating Incidents 15.1 15.2 15.3 15.4 15.5 15.6

How The Company Learns About Problems / 316 In-House Awareness Training / 317 Preparing for an Investigation / 319 Gathering the Facts / 321 Inspecting the Evidence / 322 Writing a Report / 324

16. Entering into Litigation 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9 16.10 16.11 16.12 Index

315

327

Selecting the Defense Attorney / 328 Product Liability (Civil Case) Trial Procedure / 329 Appellate Procedure / 330 Discovery: Interrogatories / 331 Discovery: Requests for Documents / 332 Discovery: Depositions / 333 Preparing for Trial: Testifying Expert v. Non-Testifying Expert / 334 Pretrial Stage: Mandatory Settlement Conference / 335 Pretrial Defense Strategies: Motion in Limine / 335 Discovery: Defense Strategies / 335 Assessing Damages and Punitive Awards / 343 Product Liability Case Studies from Appellate Courts / 344 353

Preface

Across the United States and throughout the world, there is a growing demand for safer, more reliable, and higher quality products. Recalls of unsafe products have set new records in the United States and in other countries, and many of the recalls were followed by lawsuits against those same manufacturers, distributors and importers that have now admitted to having defects in their products and designs. For the most part, manufacturing management teams strive to do the best they can to design and manufacture safe and reliable products, largely based on what they perceive is common sense and the knowledge they have at hand, but at the same time incidents of personal injury and property damage continue to multiply. It is readily apparent that not all management teams are fully equipped to challenge these trends, and such costly unpreparedness can be found even in companies with Fortune 500 revenues. Product Engineers and Designers focus on compliance to known industry and regulatory standards, but such standards are viewed by the courts as being a minimum safety requirement, with the constant evolution of technology. At the same time, corporations employ state-of-the-art management and quality systems to ensure consistency and compliance to specification, but such programs offer little to no guidance in the area of product liability, and can themselves become a liability. In this amalgam of efforts, corporations and their management teams continue to miss the mark and face the ultimate quality failure of a product, the product liability lawsuit. In some cases the lawsuit can result in a win for the defense; in others—they can devastate a company’s bottom line or even end its commercial viability. Law, and the legal process of handling a product liability lawsuit, may be the exclusive venue of attorneys, but the legal issues and expectations need to be understood by the corporate management team that wishes protection from legal threat. xiii

xiv

PREFACE

Ensuring a safe product is only a small part of the overall issue. There are numerous other elements the management team must understand and abide by in order to lessen their exposure to a devastating verdict. Foreign manufacturers especially, in striving to export their products to the United States, may be woefully ill-prepared for what could be in store for them. And at the same time courts around the world are taking their lead from American legal precedent—passing laws that clear the way for lawsuits against the manufacturers of defective products. This book will explain in detail the key issues management teams need to comprehend as well as the procedures and processes manufacturing corporations must have in place and practice everyday in order to help prevent or avoid the possibilities of a product liability lawsuit, as well as having the best defenses in place in the event of an unavoidable lawsuit. In addition to the key principles of product liability lawsuit avoidance, this book identifies those best practices which help make companies more profitable in their operations, lower warranty costs and the financial drain of field failures—and help ensure successful product launches.

Acknowledgments

The author is deeply thankful to the following material contributors that helped make this book possible: Attorneys Andre Hendrick & Kelli Smith Lott—Holland & Knight LLP Attorney Christopher Glade Johnson, Frost Brown Todd LLC Attorney Dr. Christopher Hodges, Associate Research Fellow, University of Oxford Attorney Eric J. Sinrod, Duane Morris LLP Geoffrey Peckham, President, Clarion Safety Systems Attorneys Harvey L. Kaplan & John F. Kuckelman, Shook Hardy & Bacon LLP Attorneys John D. Colahan & Mark Clarke. Latham & Watkins LLP Attorneys Karrie Cheung & Terence Lee, Smith and Partners Attorney Kevin G. Lohman, Reed Smith LLP Attorneys Dr. Jocelyn Kellam & Colin Loveday, Clayton Utz (Australia) Attorney Neil Goldberg, Goldberg Segalla LLP Attorneys Rod Freeman, Lovells LLP (London) Attorneys Siraprapha Rungpry & Michael Ramirez, Tilleke & Gibbins International Ltd. Attorneys S. Gordon McKee & Kathryn J. Manning, Blake Cassels & Graydon LLP Steven M. Hall, J. Paul Frantz, Stephen L. Young, Timothy P. Rhoades, Judith J. Isaacson, & Charles G. Burhans, Applied Safety and Ergonomics, Inc. Attorneys Veronica Hayes Gromada, Wal-Mart Stores Inc, & Michael G. Jones, Martin Pringle Oliver Wallace & Bauer LLP Attorneys Yuji Ogiwara & David E. Case, White & Case LLP xv

Figure 1.1 Best to worst legal systems in America. (Source: 2007 ILR/Harris Interactive Ranking of State Liability Systems.)

Figure 5.4 Sample frame of DesignSafe.com software.

Figure 7.1 Warning sign, prohibition sign, and mandatory action sign.

Figure 7.2 Examples of the use of supplementary text.

Figure 7.3 Example of a product safety label using a hazard severity panel.

Figure 7.4 Hazard severity panels. The yellow safety alert symbol incorporated in these hazard severity panels is the general warning sign W001 specified in ISO 7010.

Figure 7.5 The safety alert symbol.

Figure 7.6 Examples of the safety alert symbol with the new versions on the right.

Figure 7.7 Example of a safety label that uses the preferred signal word NOTICE to address practices not related to personal injury.

Figure 7.8 Example of a safety label that uses the alternative signal word CAUTION to address practices not related to personal injury.

Figure 7.9 Risk estimation and signal word selection matrix in Z535.4 Annex E.

Figure 7.10 Examples of translated safety labels (note the use of the yellow ISO safety alert symbol within the signal word panel—an ANSI Z535.4 2007 option).

Figure 7.11 Examples of translated safety labels using the preferred ANSI Z535.4 2007 signal word NOTICE to address practices not related to personal injury.

Figure 7.12

Signal word panels (with optional color).

Figure 7.14 Examples of the safety alert symbol when formatted like the ISO general warning sign.

Figure 11.3 A more organized storage system.

1 An Introduction to Products Liability The United States has been dubbed the “birthplace of product liability.” Developing from the Industrial Revolution, U.S. product liability law is derived from case law and restatements of law anchored in contract and tort. It is based on the belief that consumers need protection from business and that business should bear the costs of harms inflicted on consumers. Every year tens of thousands of product liability lawsuits are filed in Civil and Federal courts throughout the United States, as various parties seek financial compensation from manufacturers and other companies in the distribution chain for what they allege was a defective product that caused property damage or personal injury. There are continuous demands for reform in an attempt to bring under control runaway jury awards and reduce the numbers of frivolous lawsuits, areas that have plagued the U.S. legal process for decades, but such reform is immediately fought by the plaintiff’s bar because of the lucrative nature of this field. Defense attorneys and their corporate clients are stunned by some of the jury verdicts. Many juries seem to have become desensitized to the large amounts of money they are awarding. “It’s as if it is some kind of television game show, or they act like it’s not real money they’re talking about,” defense attorneys have been quoted as saying, but this surely is not the case for the manufacturing and insurance companies having to pay these verdicts, or paying the costs to appeal them for many years to follow. It continues to drive once healthy corporations into bankruptcy. A product liability lawsuit can begin as the result of a personal injury or property damage incident worth any amount, but once the plaintiff’s attorney proves negligent actions on the part of the manufacturer and its management team, punitive damage

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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AN INTRODUCTION TO PRODUCTS LIABILITY

awards against the manufacturer can rocket into the tens or hundreds of millions. To the manufacturer’s further surprise, many will find out that their insurance will probably not cover the punitive damage award; in fact in many states the courts will not even allow it. The manufacturer will likely enter into debt, even if they survive. As the United States strives for some level of sanity, other parts of the world are heading away from their highly controlled ultraconservative positions and slowly becoming westernized, modeling the simplicity of initiating legal action in the United States to what they would like to see in their own country, with contingency arrangements and the elimination of other plaintiff barriers and financial burdens, as the plaintiff attorneys overseas really begin to eye the potential gains. Every citizen in the United States pays a considerable annual cost for the day-today products they purchase as the end result of the litigious nation we live in, although most are totally unaware of it. The following are just some of the many statistics related to product liability: †

†

†

† †

†

A study conducted by Tillinghast-Towers Perrin found that overall tort cost in the United States in 2005 amounted to $247 billion, or 1.87 percent of the GDP, based on insurance liability costs not court costs, or $825 per person. Projected costs for 2007 are $253 billion, with slightly higher growth (4.5 percent) estimated for 2008 and 2009. In comparison, overall tort costs were $154 billion in 1996, a growth of 60 percent. Small businesses (under $10 million in annual sales) bear 68 percent of the liability costs (an average of $150,000 per year). Small business tort liability costs consist of – Settlements, awards, and defense costs paid directly by uninsured businesses, – Liability insurance premiums and costs incurred by insurance companies on behalf of policyholders, – Liability insurance deductibles, – Damages excluded from insurance policies, – Damages exceeding policy limits, – Punitive damages in states where they cannot be insured. Class action lawsuits have increased in the past 10 years by over 1000 percent. Median awards have risen from just over $500,000 in 1997 to over $2 million in 2003. In 2001, the latest year studied by the U.S. Department of Justice, plaintiffs won before judges in product liability trials 50 percent of the time, and 44.7 percent of the time before juries.

It is difficult to determine the actual number of product liability lawsuits that are initiated each year in the U.S. courts, largely because the state courts do not track the actual numbers, but there have been some positive overall trends in Jury

AN INTRODUCTION TO PRODUCTS LIABILITY

3

Verdicts to individual plaintiffs up to 2006. The list does not include businessagainst-business suits, class actions, or consolidated cases, but it does include medical malpractice. These are just individual plaintiffs as a single person, family, or small group of individuals who were injured in a single incident and had their claims tried in one case before the same jury. †

†

†

†

†

† †

† †

†

The average verdict in 2006 was one-third of the average in the previous year. The average verdict in 2005 was one-half of the average in 2004. The median verdict was less than half of the median the previous year. The median verdict in 2005 was a third of the median in 2004. Punitive damages accounted for just 38 percent of the total awards, compared to an average of 70 percent over the previous nine years. The average punitive damage award was one-sixth of the average the previous year. Two years ago all 10 verdicts were for more than $100 million; in 2006 there were only three. The #4 verdict in 2006 would not have even made the list the previous year. Texas had the most Top Ten verdicts (3), followed by Florida and California (2 each). For the second year in a row, New York had no Top Ten verdicts. Texas (22) surpassed New York (21) as the state with the most Top Ten verdicts over the last 12 years. They were closely followed by California (19) and more distantly by Florida (13). The total amount awarded in the Top Ten verdicts was $815 million, compared with $2.9 billion in 2005 and $5.2 billion in 2004.

Attorney Victor Schwartz, General Counsel to the American Tort Reform Association in Washington DC believes the dramatic decline in awards has more to do with a variety of restraints that have been put on punitive damages, beginning with a landmark 2003 Supreme Court decision (State Farm v. Campbell, 123 S.Ct. 1513). “The Supreme Court has established guidelines limiting the ratio of punitive to compensatory damages, some states have instituted restrictions of their own and judges are more willing to say, ‘That’s just too much’,” observed Schwartz. The total punitive damages award for the Top Ten verdicts in 2006 was one-sixth of the total in 2005. Punitives also account for a much smaller portion of the overall awards this past year—38 percent of the aggregate award, compared with 70 percent over the previous nine years. Schwartz also believes the sharp decrease in massive verdicts for individuals is due, in part, to a changing strategy among plaintiffs’ lawyers. “Nine-figure verdicts are good for headlines and publicity, but they don’t stick,” he said. “Plaintiffs’ lawyers themselves have learned that outlying verdicts will be reduced, so the smarter ones are going for $20 million to $30 million. That amount is not going to be making your list, but it’s much more likely to be preserved.”

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AN INTRODUCTION TO PRODUCTS LIABILITY

It is also interesting to note that New York had no verdicts on the Top Ten list for the second year in a row. New York had at least one verdict on the list for 11 consecutive years until 2005. Schwartz has a theory about New York’s sudden disappearance from the mega-verdict radar. “I think it might have a lot to do with the efforts of Chief Judge [Judith] Kaye to change jury laws to make sure that everyone serves,” he said. “The jury pool is now much more representative of the whole community. It’s not just unemployed people. Runaway juries are generally not representative of communities as a whole.” 1.1

COURTS AND JURY PERCEPTIONS

According to DecisionQuest, one of the nation’s leading trial consulting firms, jurors’ views of corporations are both dismal and pervasive. Suspicions are high, trust is low and these attitudes are held by a majority of eligible jurors across the nation. In a DecisionQuest survey conducted in 2002 of over 1000 eligible American jurors, the following surfaced: † †

†

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Seventy-six percent are angry with corporate America for various reasons. Sixty-three percent have developed a lesser opinion of corporations during the past year. Eighty-five percent believe that large corporations tend to hide information about the dangers associated with their products and their waste until the government or a lawsuit makes them tell the truth. Seventy-six percent believe that the way senior executives of large companies are paid promotes corporate corruption. Seventy-three percent believe corporate auditors tend to do what their corporate clients tell them to do, even if it means being dishonest. Seventy-one percent believe managers and senior executives are more prone to lie on the witness stand than lower-level employees and expert witnesses when a large corporation is a defendant. Seventy-eight percent believe many companies destroy documents hoping to avoid taking responsibility for things that they have done. Eighty-seven percent believe that corporate America must increase their contribution to the community, with minorities demonstrating stronger feelings about this issue than whites.

The research, led by DecisionQuest’s researchers, was based on a national phone poll of 1000 jury-eligible subjects in addition to a series of juror perception groups in Texas, Louisiana, Mississippi, Illinois, and California, which were ranked to be the most notorious venues by the U.S. Chamber of Commerce State Liability Systems Ranking Study in January. Juror perception groups were also held in Delaware and Kansas, which were among the states ranked fairest to corporations in the Chamber survey (Fig. 1.1).

1.2

JUDICIAL HELLHOLES

5

Figure 1.1 Best to worst legal systems in America. (Source: 2007 ILR/Harris Interactive Ranking of State Liability Systems.) (See color insert.)

The Harris Poll was based on † † † † † † † †

1.2

Tort and contract litigation, Treatment of class action suits, Punitive damages, Timeliness of summary judgment/dismissal, Discovery, Scientific and technical evidence, Judges’ impartiality and competence, and Juries’ predictability and fairness. JUDICIAL HELLHOLES

The American Tort Reform Association rated the following locations Judicial Hellholes in 2007. These are places where judges systematically apply laws and court procedures in an inequitable manner, generally against defendants in civil lawsuits.

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1.2.1

AN INTRODUCTION TO PRODUCTS LIABILITY

South Florida

South Florida has a reputation for high awards and plaintiff-friendly rulings that make it a launching point for class actions, dubious claims, and novel theories of recovery.

1.2.2

Rio Grande Valley and Gulf Coast, Texas

The Rio Grande Valley and Gulf Coast of Texas have made their way into each and every Judicial Hellholes report since the project’s inception. It is recognized as one of the toughest places in America for corporate defendants to receive a fair trial. This year, there was a surge in personal injury lawsuits related to dredging, a judge’s pocket veto of an appeal of a $32 million award against a pharmaceutical company in a case where a juror knew and had taken loans from the plaintiff, and several particularly ridiculous lawsuit filings. Despite strong statewide legislative reforms enacted in 2004, this area stubbornly refuses to shed its Judicial Hellholes reputation.

1.2.3

Cook County, Illinois

Cook County, the last standing Judicial Hellhole in Illinois (after the departure of Madison and St. Clair counties), hosts a disproportionate number of the state’s large civil cases. Personal injury lawyers know that Cook County is the place to be and this year they blew into the windy city to file massive class actions involving pet food and peanut butter, as well as many asbestos cases.

1.2.4

West Virginia

West Virginia courts have earned a reputation for antibusiness rulings, massive lawsuits and close relationships between the personal injury bar, state attorney general, and the judiciary. It is almost unique among the states in providing civil defendants with no assurance that they will receive appellate review, which can leave a business hit with a multimillion-dollar verdict with nowhere to turn. The West Virginia Supreme Court of Appeals, when it does act, has cast a shadow on the reputation of the state’s judicial system. In addition, this year, the U.S. Supreme Court denied review of the West Virginia high court’s invalidation of a law designed to stop forum shopping by plaintiffs who came from around the country to sue in Wild, Wonderful West Virginia courts.

1.2.5

Clark County, Nevada

Home to the county’s hottest gambling spot, Las Vegas, Clark County has joined the Judicial Hellholes list for the first time. The decks appear to be stacked in favor of local lawyers, who reportedly pay to play in the county’s courts. Judges have been criticized for issuing favorable rulings in cases that benefit friends, campaign contributors, or their own financial interests.

1.3 LEGAL REFORM

1.2.6

7

Atlantic County, New Jersey

Personal injury lawyers seem to have gained a monopoly in Atlantic County, a new addition to the Judicial Hellholes report. New Jersey is known for particularly plaintiff-friendly laws, admitting junk science in court and hosting lawsuits from all over the country against their state’s own economic driver, the pharmaceutical industry. All these elements were on display in the Vioxx litigation in Atlantic County. There is also evidence that litigation fairness is deteriorating throughout the Garden State, leading to the formation of the New Jersey Lawsuit Reform Alliance in October 2007. High profile issues such as class action abuse, pharmaceutical liability, asbestos lawsuits, and extraordinary awards often dominate headlines. However being cited as a Judicial Hellhole is nothing to celebrate. Litigation abuse ultimately hurts the people living in these jurisdictions, affecting economic growth and access to healthcare, among other things.

1.3

LEGAL REFORM

The litigious nature of the United States can put U.S. manufacturers at a real disadvantage in the world market. Insurance and litigation costs ultimately have to find their way into product prices, which can make U.S. manufacturers less competitive. U.S. manufacturers and their representative organizations call on Congress to initiate various acts of Legal reform and place caps on damages, but are met with strong resistance by other members of Congress and their lobbies. One of the unfortunate facts of life is that litigation is a primary source of revenue for law firms, whether you are on the plaintiff side or defense. Reforms would have a negative impact on such revenues. And ironically the dominant profession amongst those same members of Congress continues to be law, with 22 percent of members of the House having law degrees, and 58 percent of the Senate. Even looking at the list of 2008 Presidential candidates finds that the following were lawyers: Hillary Clinton, John Edwards, Rudolph Giuliani, Barack Obama, Mitt Romney, and Fred Thompson. One of them, John Edwards, gave the following speech to Iowa citizens as they prepared for the Iowa caucas: I walked into courtrooms for 20 years where there was a whole army of lawyers on the other side representing corporate America. And I went into that courtroom, and I fought them, and I beat them, and I beat them, and I beat them again. And I will beat them as president of the United States—you can count on it. —John Edwards, speaking at a Farmers Union summit in Des Moines Nov. 10, 2007

Attempts to bring about reform on a Federal level is one objective; bringing about reforms on the state level is another, but this is met with resistance as well. The number of attorneys in a state is a strong determinant of their relative influence on

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AN INTRODUCTION TO PRODUCTS LIABILITY

legislation. Thomas J. Campbell made an interesting observation about the relationship between the number of lawyers in a region and their relative influence on tortreform legislation in that region. According to Mr. Campbell, the greater the number of lawyers, the more power lawyers had to create a legal environment favorable to them, encouraging more litigation, higher awards, and less legal reform. Or, as Clarence Darrow said, “The trouble with law is lawyers.” So, in essence, we are asking lawyers to pass laws that would have a negative impact on lawyers. What are the chances? It is interesting to note that for every 320 Americans there is a lawyer—indeed, with over 1.1 million lawyers and 44,000 new lawyers entering the field every year (2006), America has the highest proportion of lawyers per capita in the world. In England, there are 694 Englishmen per lawyer, in France 2461 Frenchmen per lawyer, and in Japan 8195 Japanese per lawyer. American manufacturers have learned a lot from the Japanese over the past 20 years, except that the Japanese have little experience with product liability. Citizens of Japan have little access to attorneys. Lawyers for the most part were part of government or corporations, handling contractual issues as opposed to litigation. In addition, attorney involvement in insurance disputes increases average claim sizes. This is supported by Mark J. Browne and Robert Puelz, who found that when an attorney is brought into an insurance dispute, the average claim size increases by 64 percent. A report by Kevin M. Murphy supports the view that lawyers stunt economic growth. Studies have found that countries with a higher proportion of college law majors relative to engineering majors have slower economic growth. With all that said, there have been efforts to bring about reform. At the federal level, President George W. Bush signed the Class-Action Fairness Act of 2005, which moves most large, interstate class actions into federal courts and requires judges to consider the real monetary value of coupons and discounts so victims receive true compensation for their injuries, and demands that settlements and rulings be explained in plain English. President Bush also signed the Protection of Lawful Commerce in Arms Act of 2005, which protects firearms dealers and manufacturers from a broad swath of civil-liability lawsuits, many of them filed by municipalities. The lawsuits— modeled after litigation against the tobacco industry—hinged on the notion that guns are a public nuisance and that their makers and dealers should take special precautions in selling them. Chicago blamed gun makers for making their products available to criminals and New Orleans said the companies should be liable for not using better safety devices. The Act proscribes such civil lawsuits against the gun industry.

1.4

IMPACT ON MANUFACTURERS

Expenditures for product liability insurance premiums and other defense costs and settlements impact the bottom line and drain the funds that would have otherwise

1.4

IMPACT ON MANUFACTURERS

9

gone into the profits. The impact of this has in many cases reduced the amount of funds available for research and development, preventing many new products from making it to the marketplace, and added significant cost to many other products that are created. Part of what continues to drive this pandemonium is the perception attorneys seem to unanimously hold that corporations and their insurance carriers have deep pockets and unlimited funds to take advantage of, and the companies would rather settle such situations early, as opposed to fighting them in court or face negative publicity. This is supported by the fact that 96 percent of the product liability cases settle out of court, and only 4 percent actually go to trial. To the further dismay of manufacturers, far too many attorneys play a negotiations game, as opposed to fighting for their beliefs in court, or the beliefs of the manufacturing company they were hired to represent (through the insurance company). This is true of both types of attorneys, however, those representing plaintiffs as well as those representing the insurance companies. Negotiating a settlement is so common place that many defense attorneys have little to no real courtroom experience in products liability trials. A plaintiff’s attorney puts together the facade of a good case against a manufacturer, which includes the indisputable fact scenario of some hired (alleged) expert, albeit the individual may not in reality be a real expert or may not have spent any real time truly investigating the scene of the accident or analyzing the product in question, and they present their claim and case to the defendant’s insurance company. After the plaintiff’s attorney presents their case and findings to the insurance company, the insurance company then forwards it to the attorney they have hired to represent the manufacturer (defendant), and the negotiation game begins. The insurance company immediately asks the hired defense attorney to determine the credibility of the allegation, what it will likely take and cost to defend the case, the complications they could face in that jurisdiction, odds of winning, the amount the plaintiff is requesting or could conceivably win, and what the defense attorney thinks the plaintiff might really be willing to settle for. Granted, this is not how every claim is handled and there are large numbers of cases that undergo substantial preparation, especially the multimillion dollar cases, but again, 96 percent of the cases settle out of court, so many claims will ultimately follow this course of action, whether it takes one or six years. The problem is that most of the plaintiff attorneys know that if they put up a pretty good front, the insurance companies will try to settle instead of either paying the costs to defend the corporation’s reputation and integrity, or running the risk of potentially losing in court and paying several times the early settlement price. And unfortunately too many incompetent defense attorneys have no real trial experience and ability, and present the insurance company with a dismal picture, but save the day by getting the plaintiff to settle for half of what they were pretentiously asking, and they are heroes. Of course the plaintiff’s attorneys fully expect this. Unfortunately for the manufacturer, they lose. Having the insurance company settle on their behalf is not representing the manufacturer’s best interests, it is representing the insurance company’s best interests, unless of course the product really was defective.

10

AN INTRODUCTION TO PRODUCTS LIABILITY

The insurance industry claims that it spends as much on defending corporate policyholders against product liability actions as it spends in actual losses. As this trend continues, insurance companies are focusing their efforts on controlling the costs of legal defense and may often pursue early settlements despite the lack of credibility surrounding the case. These actions are definitely to the disadvantage of the manufacturer. This means that manufacturers need to start becoming actively involved in their own destiny. In my early experience in managing product liability litigation, incidents would surface where our products were blamed for a fire or personal injury, and after a thorough investigation I could determine that the cases lacked any credibility, based on my knowledge as the product expert. The products were merely the victim of the same fire, or the user was doing something with the product that they should never have done, but was not leveling with their own attorney as they told their stories. As the insurance-appointed attorney worked with me, he would share my opinion and be very optimistic of our chances to defend the case and take on the plaintiff. But the company was fully insured, and the insurance company was paying the entire Legal bill, and what I was unaware of was that the same attorney would tell the insurance clients an entirely different story. “The case would be tried in a state and county that would favor the plaintiff over your out-of-state company,” “The plaintiff’s attorney has facts and reports that the jury is likely to believe,” “Although the manufacturer is totally convinced that the product wasn’t at fault, I’m (the attorney) not as sure,” “If we go forward with a trial and lose, the insurance company could end up paying a considerable jury award,” and the doubting feedback goes on and on. The only problem was that as the manufacturer, I wasn’t hearing any of this. The attorney is working for the insurance company, not really the manufacturer. What is really happening is that the defense attorney is getting nervous about the possibility of actually having to present a case in court, and in all probability had no trial experience, so the attorney is attempting to convince the insurance carrier to settle through basic scare tactics. I had two situations where I was in flight to the states where trials were to start the next day, and as I was transferring planes at an airport hub I would receive a call from my secretary that the insurance company settled with the plaintiff. To say the least, I was furious, but it was really the insurance company’s money at stake and they reserve the right to handle the case however they see fit. This is one of the many problems you face when you’re fully insured and do not carry any deductible, which we changed soon afterward.

1.5

PUBLIC PERCEPTION OF CORPORATIONS

Corporations are no longer trusted as they once were, when generations after generations developed loyalties to large companies in exchange for lifetime employment. Such commitments and loyalties no longer exist. Corporate scandals like Enron make the national news, there are constant reports of CEOs receiving huge salaries as thousands of workers are let go, and it all leads to a jury dislike and distrust for large corporations.

1.5 PUBLIC PERCEPTION OF CORPORATIONS

11

Because of the magnitude of lawsuits and the litigious climate we live in, many new product ideas never make it to the marketplace because the corporations ultimately decide against their launch, not because the products were unsafe, but because of the propensity of the U.S. public to find fault with the products, blame the manufacturers for exaggerated conditions or for their own misuse and abuse of the products. In many other situations products are intentionally not marketed in the United States, but are marketed elsewhere in the world where the manufacturer is far less likely to ever experience such threats. When plaintiffs pursue a product liability lawsuit against a product manufacturer, they will look for the opportunity to include others, such as dealers, distributors, part suppliers, and other parties that may have participated in the design, manufacture, sales, distribution, or service of the product itself. The more parties involved, the more lucrative the case can become for the plaintiff. With so much potential risk riding on every product launched into the marketplace, whether it is a commercial product or a consumer product, it is pretty astounding how ill-prepared many manufacturers are in the area of product liability prevention. Not that any manufacturer could totally prevent a potential product liability case from surfacing, but surely with the best efforts in place the chances could be substantially minimized, and the manufacturer would also be in the best position to win much of what might surface. Some smaller companies may be lucky enough to have never experienced a product liability incident or lawsuit, so the management team does not see the need for the focus. Then one day they launch a new product and unfortunately overlook some critical element, and the next thing they know they have multiple accidents being reported. For companies that may have had a pretty bright future up to that point, they could now be facing bankruptcy. To draw an analogy, do you wait until you have a heart attack before you start exercising and watching your diet; many do, and some of those do not make it either. The size of the company is no indication of the level of knowledge or expertise within the company. The author’s own surveys conducted on engineering and the management teams of large fortune 500 companies even during 2002 show high percentages of employees with a significant lack of knowledge in this area, making them no different than many smaller companies. In numerous audiences comprising many well-known corporations, as well as in-house seminars at the same, more than 50 percent of the attendees had no idea of what the Z535 ANSI standard was (which is the state-of-the-art standard for the development of a warning label); many could not differentiate between the terms “hazard” and “risk,” had no idea what “indemnification” meant, nor did they even know who a “plaintiff ” is (for those of you wondering the same, the “plaintiff” is the person who is going to sue you. You are going to be the “defendant”), and that is just for openers. There is substantially more to be learned. In some cases CEOs may have gained a false sense of security because their companies have extremely comprehensive quality programs in place, and may even be certified to the ISO or QS standard. One of the largest recalls and product liability disasters in recent years happened to a company that was both QS & ISO 9002

12

AN INTRODUCTION TO PRODUCTS LIABILITY

certified. Such programs offer little protection in this area, and in fact can become a liability themselves, when documented audit records show the company is not even following its own procedures. CEOs may feel they have a talented team of design engineers, yet in one recent study of over 300 certified engineers, 70 percent of them had never received any training in product safety or product liability. It is quite common to find that a large population of engineers and management personnel, especially as they get older and feel more comfortable in their positions, never attend seminars or seek to further their knowledge in any given field. It becomes an arrogance of sort. The company itself now begins to fall victim to this lack of “state of the art, product safety, and liability prevention” knowledge, and continuously increases its own exposure to risk. These are the people the CEOs are banking on to some degree with the future of the company. Exposure to product liability does not rest with the Engineering group. Actions, or lack of appropriate actions, by most all of the management team in every area all the way up through the executive ranks can subject the company to product liability lawsuits, or be the significant cause of why the company lost a lawsuit and even ended up being hit with substantial punitive damages. So when a company only sends its Design Engineers to a seminar on the subject, the Engineers will become smarter in areas they control, but the rest of the organization will not gain any of the knowledge they need to have, because the Engineers themselves have no power over corporate procedures that pertain to other areas beyond their own. To understand what this focus totally entails, one must understand the full realm of Product Liability Prevention (Fig.1.2).

Figure 1.2 Product liability prevention.

1.5 PUBLIC PERCEPTION OF CORPORATIONS

13

The following are the questions and objectives of each of the elements displayed in the diagram: †

†

†

†

†

†

†

†

Contracts/Agreements. Does the company have sound contracts and agreements in place to help limit their potential exposure to product liability? These could be between the company and its suppliers, dealers, manufacturing reps, service companies, or even with their customers. Remember, a supplier of a component part could get you into as much trouble as you could do yourself if there are not certain safeguards in place to help shield your company from their negligence. Product Design Reviews. The design review is the first critical step in a product’s lifecycle, and the least expensive time to recognize a potential problem and make changes. Do you maintain design review teams that review all your new products to ensure quality, reliability, manufacturability, and ensure the product will be dependable, safe, and reliable for its intended use and application? Do these teams generate meeting minutes? Do procedures exist that identify the role and expectations of this design review team? Product Safety Reviews. The design review team largely focuses on the ability to build a high quality reliable product, and having the manufacturing capability of building such a product over and over again. But then there is another question concerning the review and analysis of the safety of the product, a hazards analysis and risk assessment. Are there product safety teams in place that are trained in the science of performing such evaluations of new products? Marketing/Advertising Concerns. It is not just defective products that could lead to troubles; things that you say to promote a product, things shown in promotional videos, on brochures, even on the packaging, could lead to a product liability lawsuit. It is amazing how advertising and commercials can get a manufacturer in trouble. Sales and marketing can have a tendency to push the envelope a little too far when promoting a product, overstating its features, benefits, or capabilities. Do you know what such liabilities are and what words and things to avoid? Reliability Testing. Does your company routine test new products to ensure they will be safe and reliable? Some major recent cases were lost because of the lack of adequate testing. Even with such testing, do your people know what to do if the testing produces unfavorable results? Warnings and Instructions. As stated previously, there are international standards for warning label design. Are your engineers familiar with them? Are the labels you are using in compliance with these known standards? Records Retention Programs. Records will become a key issue in your defense. In a product liability lawsuit numerous types of records will be demanded by the court, and within a short timeframe. Do you have a sound records retention program in place? Document Control. Once you produce the required records demanded by the court, what would these documents say? It is reported that 70 percent of product liability cases are lost and punitive damages awarded because the

14

AN INTRODUCTION TO PRODUCTS LIABILITY

†

†

†

†

plaintiff can prove through the companies’ own records that they had prior knowledge of a problem or defective condition and failed to react in a responsible manner. What do your records say? Do you and your employees understand what could constitute a “Dangerous Document”? Supplier Selection and Control. Component suppliers can get you into as much trouble as you can yourself. Without the proper safeguards, both companies will be sued, even though it might have been the supplied component that was really defective. Keep in mind that from a legal perspective, the more companies you can name and sue in a lawsuit, the merrier, especially when your company has the deepest pockets. Do you have adequate indemnification clauses in place? Do some of your smaller suppliers and subcontractors even carry liability insurance? Does anyone in your purchasing group even ask? Warranties. All products come with some sort of warranty, but does your sales and management team know the difference between full and limited warranties, express and implied warranties? That nicely printed warranty form may not be the only warranty you are going to be bound to, and your sales and management team probably do not even know it. Recall Procedures. Never wait for a disaster to determine how to initiate a recall. There are numerous ways of handling a potential recall, or a field problem. And if you are producing consumer products, there are other reporting requirements you must follow, or you could face substantial fines. Do you have procedures in place for your management team to follow? Do you know who would be in control? Does that individual know the ways and means of conducting a recall, or the outside resources available? Accident Reporting and Investigation. Most product liability cases do not start out that way; they start out as an incident being reported and grow to become lawsuits. If you handle it right from the start you could be successful in not only preventing a lawsuit, but also getting the other party to drop the issue altogether. If you have the tendency to just forward everything reported to your insurance company for them to handle, it is almost assured you are going to take a loss. Do your employees know how to handle such a notification of an incident?

As it can now be appreciated by the diagram and this brief outline, product liability involves more than just warning labels and design issues, and is more than just an engineering concern. It involves many aspects of the business and many, if not all the areas of management. In order to effectively limit the possibilities, everyone needs to understand the potential problems a company could face. Some company Presidents are on the leading edge of this focus and have themselves pursued in-house seminars on Product Liability Prevention for their entire management team. This helps make everyone instantly aware of potential issues and gets everyone on the same sheet of music. Each member of management begins to understand their specific role in helping to prevent the possibilities of the company being hit by a product liability lawsuit.

1.6

PRODUCT LIABILITY FROM THE INSURANCE PERSPECTIVE

15

The other alternatives involve sending more of the management team to an outside seminar, or to purchase books on the topic for everyone and meeting on a regular basis to discuss the contents and develop a plan to implement a prevention program. It should be known, however, that there are few books or seminars offered anywhere on the topic, so it will require some searching. Surprisingly, the subject of product liability prevention is not well known or taught by lawyers or law firms, not even universities, but instead by just a few experts and consultants that specialize in the specific topic. Lawyers know how to defend you and handle your case, but most have little to no idea of the inner workings of a manufacturing company, departmental roles and responsibilities, and how to incorporate such safeguards into your procedures and processes. Unlike many other manufacturing management seminar topics, this subject really captures the attention of most management personnel, and more importantly the information stays with them for a long time. Even for companies with few to no product liability problems, the incorporation of these safeguards and operating practices into your current operating procedures will be effective in reducing quality costs, field warranty problems, scrap and rework, and basically help to build a more reliable product and eliminate bad practices. 1.6

PRODUCT LIABILITY FROM THE INSURANCE PERSPECTIVE

For a manufacturing corporation to make money, it needs to dream up an idea for a new product, design, engineer, manufacture, and market it, and in the end hope they can sell enough of the products for the right price to make a profit. For insurance companies, the process almost works in reverse. The manufacturer pays the insurance company a large amount of money to cover them for product liability, and it is all 100 percent profit to the insurance company and remains that way if there are never any claims. Then if claims do arise, the insurance company pays the claims out of the funds it received from the company’s premium payments. At this point the percent of profit begins to fall. If there are significant payouts, then the insurance company exhausts the manufacturer’s funds and ends up paying claims out of its own pockets, which comes back to haunt the manufacturer when the policy renews. The following entities need Products Liability insurance to protect against lawsuits: manufacturers, distributors, reconditioners or rebuilders, lessors, successor corporations and even employers. These can all be held responsible when a product causes injury. †

†

Manufacturers are required by law to ensure that their products are reasonably fit, suitable, and safe for their designed purpose. Also, the manufacturer may be liable even if its product was altered or misused, if the alteration or misuse is deemed as reasonably foreseeable (when a product’s use or change could, and should, be reasonably expected and guarded against). A distributor can be held liable because in a strict liability action, liability can be extended to everybody in the chain of distribution. Particularly when the manufacturer is foreign and is not subject to U.S. laws, the distributor becomes next in line for all potential claims. When considering strict liability, the courts

16

AN INTRODUCTION TO PRODUCTS LIABILITY

†

†

†

†

typically view the injured parties as more innocent than the distributor or retailer and less in a position to protect themselves. The reconditioner or rebuilder of a product or component part has a duty similar to that of a manufacturer. If the rebuilder or reconditioner fails to incorporate a safety device, when feasible, the rebuilt machine or component part will be deemed a defective product and the rebuilder or reconditioner will be viewed by the courts as the same as a manufacturer of a defective product or part. Lessors of products are subject to products liability claims because the lease agreement contains an implied warranty that the leased products are fit for use throughout the duration of the lease. When a successor corporation purchases the assets and liabilities from another corporation and undertakes the same manufacturing operations as the selling corporation, the purchasing or successor corporation is strictly liable for injuries caused by defects in units of the same product line, even if the product or component was previously manufactured and distributed by the selling corporation or its predecessor. In rare instances, employers can be sued by their employees for product injuries. However, typically, this can only happen when there is a third party indemnity agreement in place. When there is a third party agreement in place, it is possible for employees to circumvent The Workers’ Compensation Act and sue their employers for products liability.

As my websites centering around product liability prevention have appeared on the Internet for many years, it is common to receive all kinds of emails and inquiries related to all aspects of the subject, including insurance. Inventors of things like new types of exercise equipment and small upstart manufacturers would ask whether they really need to have product liability insurance, and where they would even get it. It is hard to imagine any type of product manufacturer that probably would not need product liability insurance. If you are placing a product in today’s marketplace, you are in all likelihood facing some possibility of a product liability claim, and it would be more of a question of whether your odds were 1 in 50,000, 1 in 100,000, or one in a million. What can product liability insurance coverage cost for a manufacturer or distributor; Table 1.1 presents a few examples in 2007. Although distributors have product liability exposures from all products they sell, there are additional risks when procuring products overseas. A foreign supplier is often beyond the effective reach of the U.S. courts, dramatically increasing the risk of product liability claims to the distributor. Foreign suppliers do not fully understand the North American environment for product liability claims and often fail to purchase product liability insurance, or accept limitations of coverage that may seriously limit its value to the distributor. Obtaining valid certificates of insurance is always a challenging and timeconsuming process, which can become near impossible when dealing with a foreign supplier who has no tradition of purchasing product liability insurance or may have limited access to markets that can provide it. Even if the distributor

1.6

17

PRODUCT LIABILITY FROM THE INSURANCE PERSPECTIVE

TABLE 1.1 Examples of Product Liability Insurance Coverage Costs for Manufacturers and Distributors in 2007 Manufacturer/ Distributor

Sales, $

Annual Premium, $

Policy Limit for Each Claim (Aggregate), $

Deductible/ Retention, $

Trampoline manufacturer Skateboard distributor Motorcycle helmet distributor Medical device manufacturer Sports insoles manufacturer Personal care products Roller skate manufacturer Brushless electric motors manufacturer Walking cane company Receiver/software designer

500,000

14,500

5,000

1,000,000

17,063

1,600,000

41,966

320,000

5,722

2,000,000

3489

500,000

5,000

500,000

17,125

2,000,000

3,680

1,000,000 (2,000,000) 4,000,000 (5,000,000) 1,000,000 (2,000,000) 1,000,000 (2,000,000) 3,000,000 (5,000,000) 1,000,000 (2,000,000) 1,000,000 (2,000,000) 1,000,000 (2,000,000)

500,000

12,500

150,000

12,500

1,000,000 (2,000,000) 1,000,000 (2,000,000)

5,000 15,000 5,000 5,000 5,000 5,000 0

5,000 5,000

finally receives a valid certificate from an A-rated U.S. insurance company, there is still a fundamental drawback because the certificate has an expiration date. Securing a renewal certificate can be difficult if the distributor is no longer buying from the supplier and impossible if the supplier is out of business. Manufacturers, importers, and distributors also need to keep in mind that even if an offshore supplier of a product had insurance at the time of the original partnership and business transaction, and supplied the purchaser with a valid certificate of insurance, if the product proves to be defective six months later and results in a lawsuit, the only insurance the purchaser can count on is the insurance the supplier actually has at the time of the claim. So in essence, if the offshore supplier obtained product liability insurance as part of the requirement of being a supplier to the U.S. company, sold the U.S. company thousands of products and completed the transaction, and then dropped the insurance coverage because of the ongoing cost, and one of those products then caused damage or injury months or years later, the U.S. company would find out that there is no insurance to cover the loss because at the time of the accident the original supplier no longer had insurance, and the U.S. company would end up covering 100 percent of the loss themselves. This comes as a shock to all the Purchasing departments that maintain supplier files with one-time insurance certificates. Many companies that are more advanced in this area will also require that they be named under “Additionally Insured” (AI) on their supplier’s insurance certificate, but this too has its problems. The purpose of a certificate of insurance is to provide proof

18

AN INTRODUCTION TO PRODUCTS LIABILITY

of insurance only. It does not alter the policy coverage in any way. If the primary company is requesting to be named as an additional insured to the policy, the policy must actually be endorsed with carrier approval to include the appropriate AI language. What typically happens is then the certificate of insurance is issued to include in the description of operations that ABC Co. Inc. is named as an additional insured and subject to the provisions under the AI coverage form CGXXXX XX. Without this policy endorsement, there would be no obligation of the insurance company to grant coverage to the AI in the event of a loss. Every insurance company has their own process or procedure as to whether they will notify cert holders or additional insureds when an account cancels. Cancellation laws vary by state but there is no statute that mandates notification. Generally speaking, an additional insured/certificate holder is NOT notified of policy cancellation unless the coverage under which an additional insured is named clearly specifies that they are to be notified. The certificate reads that the company will endeavor to mail xxx a notice of cancellation. This language does not change the terms of the actual insurance contract. So no recourse to company is imposed by the statutes if cancellation notification is not sent. In most cases, the job or work being done for the certificate holder has already been completed and notification becomes an administrative nightmare so companies have moved away from this as general practice. It can be done, if the company agrees to the request and the account is somehow flagged. Again, not all insurance companies treat or handle this in the same manner. 1.7

INSURANCE COMPANIES SUPPORTING PLP PROGRAMS

The major insurance companies are heavily supporting Product Safety and Liability Prevention programs and training, and in addition to recommending the seminars to their manufacturing clients, they are additionally sending their own in-house experts to the same PLP training seminars held around the world by the author. One of the major insurance companies conducted a study involving a review of 68 high cost accident report write-ups from the claims department. From these reports they developed a database on a spreadsheet that included the insured’s name, product involved, date of loss, date reported, nature of loss Bodily Injury/Property Damage (BI/PD), and description of the causal factors. The carrier was able to determine the current loss estimate on 26 of the accidents from a loss run valued by 3/1/06. This portion of the cases amounted to $23.6 million. This would project to $61.7 million for all 68 cases if the value was known for all of the remaining reports. Statistical data from the study found the following: †

†

†

Of the claims, 57 were bodily injury with 8 being fatal. This accounts for 84 percent of the total. Of the claims, 9 were for property damage, which accounts for 13 percent of the total. Of the claims, 2 were recall related type situations, which accounted for the remaining 3 percent of the total.

1.7 INSURANCE COMPANIES SUPPORTING PLP PROGRAMS

19

TABLE 1.2 The Loss Run Cost Summary Type of Cost

Amount, $

Indemnity outstanding Indemnity paid Legal paid Additional expenses

40,955,526 37,086,033 8,288,482 2,776,980

Total

88,309,776

The following was observed for the type of products involved: † † †

General consumer products, 25 percent; Recreational products, 24 percent; General commercial products, 51 percent.

In addition to this study, the carrier did another study of all product liability claims for the years 2002 – 2005 with cost estimates greater than $25,000 (415 claims) and took a look at the time delay in reporting and settling those claims. Table 1.2 summarizes this. What the data confirmed to the insurer are the following. † †

† †

†

Most products claims are bodily injury claims. Claimants will most often have alleged poor design, inadequate warnings, and instructions. Allegations rarely involve issues concerning quality control. When the insured has had a prior recall involving the product or a similar product this will be raised as an issue. Products cases are often reported sometime after the actual accident and will take a long time to settle (the tail effect).

The insurance carrier initiated new underwriter risk investigative sections that address design, warnings, and instructions: †

†

†

Design. What specific codes does the insured design to? Has any independent testing or evaluations been made to determine if the codes used are appropriate and current? When was the last time the insured checked to see if any of the applicable codes had changed? Warnings. Are warnings meeting applicable codes? Are instructions written to an education level that represents a typical user of the product? Have they been reviewed by anyone or tested on potential users to see that they are understood? Recalls. If an insured has had a prior recall how successful was it? Do they have any similar products that could have similar exposures or uses that could lead to more claims in the future? What sorts of recalls have occurred in the insured’s industry?

20

AN INTRODUCTION TO PRODUCTS LIABILITY

From these study findings the insurance company instituted some standard recommendations they planned to use with future insureds when a need is identified in the insured’s existing products safety program.

1.8 RECOMMENDATIONS THAT CAN BE USED ON PRODUCTS LIABILITY ACCOUNTS RELATED TO DESIGN, ADVERTISING, INSTRUCTIONS, AND PRODUCT RECALL 1.8.1

Design Standards Review

It is recommended that a periodic review be made of existing standards that relate to your products. This review should be made to determine if any new or revised standards are present that relate to your products. If any are found it will be necessary to adapt your product to meet or exceed these standards. Also depending on your product and the nature of the change, you may also need to complete new independent tests of your product. This design standard review should be conducted at least every three years and more often if your product is already the subject of a number of standards. Records of these reviews should be maintained for 10 years.

1.8.2 Complete Outside Reliability Testing to Validate Safety Claims Made About Your Product or Critical Design Points Outside expertise and testing is an important component of your ability to prove the claims that you may make about your products. Whenever possible you should conduct tests according to applicable standards related to the product such as ANSI or MIL Standards. Such testing should be repeated whenever you make changes to your design that could impact your ability to prove your claims. Any products that have not been retested in the past three years should be tested or retested as the situation warrants. In selecting an independent testing agency it is recommended that you prequalify them as being right for your product. This can be established by their prior experience as well as any credentials or certifications that they may have. Test records should be maintained for ten years.

1.8.3

Complete a Legal Review of Your Marketing Materials

Your marketing materials should be reviewed by legal council to determine if any claims are being made that could cause a problem in a litigation situation. This includes marketing materials, packaging, use and assembly instructions, print media, and internet advertising. Our review of the materials provided identified the following, which has suggested a need for a more in-depth legal review.

1.8

RECOMMENDATIONS THAT CAN BE USED ON PRODUCTS LIABILITY ACCOUNTS

21

1.8.4 Analyse Customer Service Center Logs to Identify Trends that Could Be a Potential for Future Liability Claims The logs that you maintain can be a valuable source of information to identify the potential for future product-related accidents. The failure of a critical part that did not result in an injury or property damage can often be a warning that such an outcome could occur in the future. 1.8.5

Develop Product Recall Plan

Product recall can be a difficult if not impossible task when no advance planning or consideration has been given to initiating a product recall. Management should ask how they would institute a recall if needed. The following are some questions to be asked: † † † † † † † † †

Who will decide when a recall is needed? What is the nature of the product problems you could logically expect? How would you determine what items to recall? Whom would you notify of the recall? How would you notify them? What would you have the notified parties do when they receive the notification? Would you repair or replace the product involved? How would you go about remediation of the situation? Who would you need to assist with the recall (inside and outside staff or equipment)?

With the answers to these questions a written plan should be developed for handling a recall. In some cases you may be able to test this plan as a joint project with a critical distributor. A helpful reference concerning product recalls can be found on the Consumer Products Safety Commission’s web site (www.cpsc.gov). The publication entitled Regulated Products Handbook Document 8001 (January 2005, Chapter 3) can be found in the Publications Section under General Information on the web site. 1.8.6 Develop a Plan for Processing and Investigating Product Liability Claims A written procedure should be developed for the investigation and processing of product-related accidents and claims. The plan should involve internal notifications, assignment of investigators, and the means to be used to gather information about the incident. Also it should be determined who will report the claim to the insurer as well as which of your internal experts are to work with the insurer on the handling of the claim. These were the findings and direction just one of the major insurance companies planned to follow beginning in 2006. A number of other insurance companies

22

AN INTRODUCTION TO PRODUCTS LIABILITY

confirmed to the author that they too are conducting audits of product liability prevention programs and efforts in place within future insureds’ operations, and would especially require that new clients would have to have formal recall procedures in place, or they would not insure the companies.

1.9

TOUGHER REQUIREMENTS FROM THE CPSC

The year 2007 was not kind to the U.S. Consumer Product Safety Commission (CPSC). The year also saw a proliferation of recalls of products made in China, with mounting concerns on Capitol Hill and in state capitols about the risks posed by certain children’s products. Consumer groups and former agency officials like former Chairman Ann Brown agitated for congressional action, and for the first time in recent memory Congress held multiple oversight hearings where Acting Chairman Nancy Nord was grilled about agency operations, priorities, and shortcomings. These hearings, sometimes televised, received widespread coverage in the media. Key members of Congress, including Speaker Pelosi, took their turns at agency-bashing and there were few, if any, agency defenders to be found. In the meantime, the morale of the staff seems generally to remain low, and key departures continue. 1.9.1 Consumer Product Safety Improvement Act of 2008 (H.R. 4040) These events culminated in numerous legislative proposals during 2007 and 2008, ultimately leading to the passage of the Consumer Product Safety Improvement Act of 2008, which President Bush signed into law on August 14, 2008. In summary, lead will effectively be banned from toys and children’s products. So will some phthalates. Toymakers will be required to have independent labs test products before they are sold, and voluntary safety standards would become mandatory. Consumers could eventually see labels certifying toys have been tested before being sold, as well as warning labels, whether they buy a toy online or through a catalog. Consumers would also be able to look up complaints or accident reports involving not only toys but lighters, electric saws, cribs and other goods in an online database. The CPSC will also receive a large boost in resources and authority. The agency budget will nearly double to $136 million, from $80 million for the 2007 fiscal year. The CPSC will have the assistance of state attorneys general who will have the authority to help enforce federal product safety laws. They will be able to take manufacturers to court to keep dangerous products off the market. Companies that fail to report hazards or violate product safety laws could face as much as $15 million in penalties. Previously, that amount was capped at $1.8 million. Toys and Children’s Products †

Many of the Act’s provisions, including bans on phthalates and lead, are tied to new definitions and general rules applicable to all children’s products and more specific rules for toys and child care articles.

1.9 TOUGHER REQUIREMENTS FROM THE CPSC

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“Children’s products” are defined as “a consumer product designed or intended primarily for children 12 years of age or younger. “Children’s toys” include products “designed or intended by the manufacturer for a child 12 years of age or younger for use by the child when the child plays.” “Child care articles” are defined as “a consumer product designed or intended by the manufacturer to facilitate sleep or the feeding of children age 3 and younger, or to help such children with sucking or teething.”

Ban on Phthalates in Toys and Children’s Products †

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Prohibits the sale of children’s toys and child care articles with concentrations of more than 0.1 percent of di-(2-ethylhexyl) phthalate (DEHP), dibutyl phthalate (DBP), or benzyl butyl phthalate (BBP). Effective 180 days after enactment. Establishes an interim (effective in 180 days) ban on the sale of children’s toys that can be placed in a child’s mouth and all child care articles that contain more than 0.1 percent of diisononyl phthalate (DINP), diisodecyl phthalate (DIDP), or di-n-octyl phthalate (DnOP). Toys that can be put in the mouth are defined to include toys or parts smaller than five centimeters in dimension, and exclude toys that can only be licked. Provides only limited preemption of state laws regulating phthalates and phthalates alternatives—many states have adopted laws banning various phthalates in the past year.

Ban on Lead in Toys and Children’s Products †

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Mandates a phased-in ban on lead in all children’s products, requiring that lead levels be reduced to 600 parts per million within 180 days, 300 parts per million within one year; and 100 parts per million within three years of the bill’s enactment. Special provisions apply to lead paint (0.009 percent and possibly lower after further studies are conducted). Inaccessible component parts are generally exempt.

Additional Safety Rules Affecting Toys and Children’s Products †

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Adopts ASTM F963-07 standard as a mandatory consumer product safety rule and directs studies that may result in additional rules. Mandates testing and certification of imported children’s products for compliance with safety standards, with detailed requirements for laboratory accreditation, firewalling rules for labs owned or controlled by the manufacturer, and priorities for testing certain products. The testing and certification provisions take effect 90 days after the CPSC has published its requirements for accreditation of third party testing bodies; the CPSC must publish these requirements within 30 days for lead paint, 60 days for cribs, 90 days for small parts, 120 days for metal jewelry, 210 days for baby bouncers, walkers and jumpers, and 10 months for all other children’s products. Creates new rules for durable infant and toddler products, including cribs, high chairs, strollers, infant carriers, bath seats, gates, swings and other items, that

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will facilitate owner registration by requiring manufacturers to provide postpaid registration cards and to take other steps that will enable more efficient distribution of recall and safety notices. Mandates permanent tracking labels on children’s products and their packaging with source, production date and batch information that will better enable recalled products to be tracked and identified. These labels must be in place within one year of enactment. Expands warning requirements for choking hazards for children’s toys and games. The Federal Hazardous Substances Act requires warnings on packaging and accompanying descriptive materials for toys and games containing small balls, balloons, small parts and marbles that they present choking hazards and are not for children under age 3. The new Act requires that these choking warnings be included in all Internet advertisements within 120 days of enactment and in all catalogs and other printed materials within 180 days if they provide a “direct means for the purchase or order of the product.”

Recalls and Enforcement †

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Greatly increases civil penalties for violations of the CPSA, as well as the Flammable Fabrics Act and the Federal Hazardous Substances Act, to $100,000 for each violation, with a maximum cap of $15 million for a related series of violations (the existing limits are $8,000/$1,825,000). Authorizes state attorneys general to enforce the CPSA and related laws by seeking injunctive relief, but requires states to give the CPSC advance notice of any intent to initiate a state action. (State enforcement previously was prohibited, and the CPSC objected to this provision of the new Act.) Increases criminal penalties by permitting larger fines, up to five years’ imprisonment, and forfeiture of assets associated with a violation, and removes a requirement that directors, officers and agents be aware of violations before being criminally charged. Eliminates the right of a party recalling a product to elect whether they will offer a refund, repair or replacement for recalled products and permits the CPSC to require a refund, repair and/or replacement as the CPSC determines to be in the public interest. Creates new requirements for the content and dissemination of recall notices and permits the CPSC to require recall notices in languages other than English. Prohibits any CPSC regulatory activities from preempting damage claims arising under common law and state statutes, or from preempting California Proposition 65. Establishes whistleblower protection for private employees who report violations, testify or otherwise provide assistance in consumer product safety enforcement proceedings.

1.9 TOUGHER REQUIREMENTS FROM THE CPSC

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Provides stronger prohibitions against selling banned or recalled products, or any products that violate product safety regulations. Calls for a study to determine the feasibility of requiring that manufacturers, importers and retailers establish escrow funds, purchase insurance or otherwise provide financial security to pay for recalls and/or destruction of recalled products.

Other Products and Substances †

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Bans 3-wheeled all-terrain vehicles (ATVs) and strengthens regulation of other ATVs, especially those intended for use by youth. Mandates a study of risks resulting from formaldehydes in textiles and apparel.

Import-Export Issues †

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Imposes mandatory testing and certification for imported children’s products, as discussed above. Prohibits the export of recalled or non-conforming products to other countries, subject to certain exceptions. Establishes policies to utilize the International Trade Data System established under the Tariff Act of 1930 and to increase cooperation with U.S. Customs and Border Protection to prevent unsafe products from entering the United States. Establishes procedures to destroy products that have been refused admission into the United States for failure to conform to safety regulations. Authorizes further studies to assess the effectiveness of measures and activities intended to prevent the importation of unsafe products into the United States.

Administrative and Procedural Changes †

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Mandates that the CPSC establish a searchable database, accessible to the public on the Internet, on the safety of consumer products that will include reports from certain sources on deaths and injuries reportedly caused by consumer products, and which includes manufacturers’ names, product names and other information. Requires that the CPSC shares information with state public health agencies. Bans industry-sponsored travel by CPSC commissioners and staff, and authorizes a travel budget to address the increasingly global market for consumer products. Restores the five-member Commission (it has operated with only three commissioners) and authorizes significant budget increases for the agency. Provides for expedited rulemaking by the CPSC.

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1.10 #1 VERDICT OF 1999: $4.9 BILLION AGAINST GM FOR GAS-TANK EXPLOSION—LIVE DEFENSE DEMONSTRATION BACKFIRES AND TURNS THE TIDE1 Two lawyers from a small firm took on the world’s largest automaker and came away with a staggering $4.9 billion verdict for six people severely burned when their 1979 Chevy Malibu was rear-ended by a drunk driver and exploded into flames. The impact caused the fuel tank to rupture and explode. The verdict, which includes $4.8 billion in punitive damages, is the largest personal injury verdict in history. The trial judge subsequently reduced the punitive award to $1.09 billion. General Motors (GM) continued to deny responsibility for the injuries and appealed the case based on several evidentiary rulings. “The plaintiffs were innocent victims of a drunk driver (who) barreled into them at a speed in excess of 70 miles per hour,” says GM’s lawyer Richard Shapiro. Shortly after the 1993 crash, California Lawyers Brian Panish and Christine Spagnoli set out to prove that GM put profits over safety by leaving the fuel tank in a vulnerable spot directly in front of the rear bumper. They asserted that for a minimal cost GM could have moved the fuel tank to a safer spot over the rear axle. GM argued that the crash—not a defective fuel system—caused the injuries. Following several years of contentious discovery Panish and Spagnoli, partners in a 12-lawyer firm, broke GM’s back with the help of an infamous 1973 memo written by a GM engineer. The so-called Ivey memo contained an analysis that fuel tank-related facilities cost GM roughly $2.40 per car, while another GM study indicated that it would cost $8.59 per car to implement the safer tank-over-axle design. The lawyers contended that the two memos demonstrated that GM was willing to risk thousands of lives to save six bucks a car. Although the Ivey memo had been circulating among plaintiffs’ lawyers since 1984, GM managed to keep the potential bombshell out of all its fuel tank cases until 1998, when the plaintiffs’ lawyers in another case obtained evidence linking the memo to GM’s decision-making. Panish and Spagnoli were only the second team of lawyers ever to get the memo into evidence. They had a second big break when GM lawyers brought the jury to a garage to view the results of a crash test they said proved the tank was safe and to the horror of the company’s lawyers, the test car’s gas tank leaked right before the jurors’ eyes. “At that moment I felt like someone was looking out for us and that the truth was coming out,” says Panish, lead trial counsel in the case. But getting to that point was far from easy. “It took everything we had to do it. It took three full-time investigators, numerous attorneys, expert witnesses, and hundreds of thousands of dollars,” says Panish. The plaintiffs filed suit in 1994 and the case went to trial in June 1999. Panish and Spagnoli handled all of the case preparation 1

By Eric Berkman for Practice Lawyers Weekly USA.

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and represented all four children at the trial. During the trial, they brought in Carl Douglas to represent the mother and Attorneys Mark and Jeff Robinson to represent her friend. Panish says that GM used an army of lawyers by comparison. “They had people from Snell Wilmer (100-plus lawyer firm in Phoenix), in-house people, new people showing up every day helping them prepare witnesses and work on the case,” he says. “They even rented suites of offices in downtown LA just for this case. So we needed a little help and it worked. We worked together as a team.”

1.10.1

Feel the Pain

According to Panish, the key to obtaining huge verdicts lies in tying the punitive awards to company profiles. This shifts the focus from what the plaintiffs and the lawyer stand to gain from the verdict to handing out a punishment severe enough to force the company to change its dangerous behavior. Spagnoli says that she and Panish described GM’s financial situation by showing how much the company rakes in on a daily basis and what it spends each year on advertising. “That way the jury could focus on an amount to send a message that GM couldn’t just write this off as a cost of doing business,” says Spagnoli. It is a strategy that has helped Panish win punitive damages in four of the last five cases he’s tried. “What I generally tell the jury is that here’s where they really have a chance to make a difference,” he says. Panish usually starts by telling the jury that punitive damages are also known as exemplary damages and for good reason. “They may be intended to punish, but they’re also intended to make an example of someone and to reward those companies or defendants that engage in proper conduct,” he explains. “If you allow someone who engages in reprehensible conduct to get away with it, you reward them and punish those who do the right thing.” He also explains to the jury that there should be no limit or cap imposed on punitive damages. “That would just allow the business to stick punitive damages into their cost– benefit calculations,” he says. “They could just throw in the maximum amount they can lose and puts profits over safety all over again.” But he also admonished the jury that their job was not to put the company out of business, but to give it some real food for thought. “It’s just like if you have an employee who’s not doing the right thing,” he says. “You don’t necessarily want to fire them, but you do want to discipline them.” So Panish asked the jury to dock GM two weeks’ pay—like they might do with an insubordinate employee—to make it hurt a bit. This two-week pay came to $4.8 billion.

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“Just hitting them with, say, $500 million would have been less than 1 percent of their net worth, which is no big deal,” he says. “But two weeks’ pay would be enough to get the attention of GM’s high executives who would see it, go out and try to figure what happened.” Panish adds that the only difference between his arguments in this case and his other punitive cases was the size of the company. A day before the verdict was reduced, the plaintiffs offered to cut $4.5 billion from the award if GM would recall the Malibu and other cars with the same fuel tank design. “Our client said, ‘We don’t want this money for ourselves because that’s what the compensatory damages are for,’ ” says Spagnoli. “They also said they wanted GM to use the money for something positive.” GM rejected the offer, but since the reduction Panish has made a similar offer to return $700 million of the $1.09 billion punitive award. “They still maintain there’s nothing wrong with the car,” he says. Meanwhile, the plaintiffs have pledged to donate half of their punitives to the State of California for programs benefiting burn victims.

1.10.2

Explosive Crash

On Christmas Eve, 1993, plaintiff Patricia Anderson was driving home from church in Los Angeles with her four children and 10 year old Tigner, a family friend. As she slowed for a red light, a car slammed into her from behind, puncturing her gas tank and causing her 1979 Chevy Malibu to burst into flames. Bystanders immediately smashed the front windshield with a shopping cart and pulled Anderson and Tigner from the burning car. They suffered severe burns to their face and body. It took considerably longer to get the children out of the back seat and their injuries were more severe. Three of the children—one-year-old Ty-Shon, seven-year-old Kionna, and eight-year-old Kiontra—suffered third-degree burns to various parts of their bodies. Alisha, six, suffered the most severe injuries. Her ears were burned down to the cartilage and her face and body were left permanently disfigured, laced with ridges of ropy scar tissue. She also lost all the fingers on her right hand and has undergone 70 surgeries since the accident. The driver of the other car, Daniel Moreno, had a blood alcohol level of 0.20, twice the legal limit, and was later convicted of felony drunk driving. At the time of impact, he was traveling at 49 mph according to the plaintiffs, and 68 mph according to the defense.

1.10.3

Defense Case

The defense case centered on two primary arguments—that the blame for the victims’ injuries should be placed on the drunk driver who caused the accident and that speed, rather than faulty design, was the reason the gas tank ruptured.

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Shapiro told Lawyers Weekly U.S.A. that the company is appealing based on a number of evidentiary rulings made by trial judge Ernest Williams. For example, says Shapiro, Williams excluded as irrelevant the following: † †

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Testimony on the Malibu’s safety record; A mid-1970s fuel tank location study that allegedly demonstrated that GM engineers concluded the rear location was a safe place to put the tank; Evidence of the blood alcohol level of the driver who rear-ended the Malibu.

According to Shapiro, this evidence would have supported the company’s argument of a high-speed crash because an impaired driver would be slower to hit brakes. “There were so many errors committed by the judge that he literally prevented us from putting on a defense,” says Shapiro. “We’re confident the verdict will be overturned, aside from just the amount which is outrageous and unprecedented.” 1.10.4

Survivable Impact

It was clear from the start that the defense would argue that the drunk driver was responsible for the plaintiffs’ horrific injuries. But when Panish read the police reports he quickly identified a gaping hole in that argument; the plaintiffs suffered no major injuries beyond the burns. Therefore, they could have walked away from the accident if the gas tank hadn’t exploded. “It was clearly a survivable impact case,” says Panish. To prove this theory, the plaintiffs’ lawyers knew they would have to demonstrate the following: † † † †

The fuel system on the Malibu was unsafe. GM knew it was unsafe. GM had the technology to build a safer fuel system. GM had a profit motive for not installing the safer system.

One of the key elements of GM’s case was the speed of the drunk driver. GM argued that he was going at 68 mph and that no fuel tank could withstand an impact of that magnitude. The plaintiffs countered with expert testimony, which placed the speed at 49 mph. The battling experts testified for five days. “This is a critical point because GM admitted that the tank shouldn’t have leaked if the speed was less than 50,” says Spagnoli. Spagnoli argued that the absence of major injuries, only two broken legs among six victims, supported their argument that the drunk driver was going at less than 50 mph. “We just couldn’t see how eight people in two cars, all not seat belted, walk away from a 70 miles per hour crash,” says Spagnoli. “It just slaps you in the face. How could this happen?”

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The jury decided the issue in favor of the plaintiffs. Meanwhile, Panish and Spagnoli set out to prove that the Malibu’s fuel system was defective even at speeds below 50 mph. This is where the years of document discovery paid off. According to Spagnoli, GM had been unwilling to turn anything over without a protective order, which typically took months. “Then they’d give you so much it was like looking for needles in haystacks,” she says. “Or you’d get crash test photos that were illegible Xeroxes. So then we’d ask for stuff we could actually read. And they’d continually give it to you in little pieces. Or you’d get waves of stuff never knowing if you had it at all.” Panish adds that he spent thousands of hours traveling between LA and Detroit, where they pored through boxes upon boxes of documents and microfiche in the offices of GM’s local counsel. “I’d sit there 8 to 10 hours a day with people watching me like a hawk,” he says. “And we had to make motions to compel for almost everything. The judge even had to appoint a retired judge to act as a referee who we had to pay—to rule on these motions. It all took an unbelievable amount of time.” They hit pay dirt when they unearthed results from GM crash tests conducted between 1978 and 1981. These tests revealed that in approximately 45 tests at less than 50 mph, the Chevy Malibu fuel system encountered 14 leaks and five incipient leaks after GM certified its crashworthiness to the government. An incipient leak is a near-miss that occurs when a hole forms in the tank or when a car part comes in close contact with the tank. Panish says that these test results showed the jury that the fuel system was defective and that GM knew it, especially when coupled with testimony from GM engineer William Cichowski, who said that since 1968 every GM “!-body” sedan except the 1979 Malibu was designed with the fuel tank further forward than in previous models. Cichowski admitted on the stand that GM was doing this to improve crashworthiness—proof that GM knew that the Malibu’s system was unsafe, says Panish. But the most dramatic moment came outside the courtroom. GM had consultants conduct a special crash test in 1998 during the pretrial stage to show that the Malibu’s fuel system could withstand a 50 mph crash test. When GM lawyers took jurors to see the crash test results, they were shocked to find the tank leaking. As part of Cichowski’s testimony a year later, the jury and the judge went to GM’s garage to look at the test car. “They lifted it up and there were these reddish-orange drops coming from the tank,” says Spagnoli, referring to the solvent used instead of gas during crash tests. “The jurors noticed and one of them (asked) for the tank to be taken out. They could only see the underside, which was basically clean, so they wanted to look at the whole tank, but GM refused.” Cichowski denied that the tank had actually leaked during the test, insisting that the solvent must have appeared as a result of the car’s handling after the test. So Spagnoli presented him with pictures of the car that the plaintiffs’ accident reconstructionist took right after the crash test. These pictures showed that the underside

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of the tank was streaked with solvent. “This was the last slam of the door on their claim that the tank didn’t leak,” says Spagnoli. “Cichowski seemed like he was caught totally unaware and wasn’t prepared for what we had and after the trial, the jurors were very critical of this crash test.” Shapiro, however, contends that the tank never leaked, either during the test or at the jury view. “During the test there was slight leakage from the gas cap, but it was less than the one ounce per minute permitted under safety standards,” he says. “And at the jury view, it was transmission fluid that the jury saw, not solvent from the gas tank.” Furthermore, he contended that the refusal to honor the juror’s question to remove the gas tank was a mutual decision by both sides. Neither wanted to drag out an already lengthy trial, he said. Spagnoli, however, insists the decision was entirely up to the defense. 1.10.5

Lowered Standards

Even with strong evidence that the Malibu fuel system was defective, the plaintiffs could not win without showing that GM could have done something to remedy the situation. They did this by analyzing GM internal memos, meeting minutes, and test results dating back as far as the 1950s. Their focal point was 1966, when the federal government first proposed a new safety standard requiring that fuel tanks be able to survive a 30 mph “fixed rear barrier” test, which is roughly equivalent to a car traveling at 60 mph hitting a stationary car. The National Highway Traffic Safety Administration solicited public comment on the proposed standard at the time and kept it all in a docket. The docket included four boxes of comments, which Panish and Spagnoli sifted through. Amidst the mass of documents they found replies from GM saying the company could not possible meet the standard. But the internal GM documents Panish uncovered during discovery tell a different story. For example, he obtained the following: †

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A 1966 report by a GM safety engineer stating that the company could quickly meet the standard; A 1971 memo by GM engineer Jack Ridenour reporting that NHTSA’s proposed standards could be met by placing the gas tank over the rear axle; A report from GM engineer Fred Aldrich, stating that crash tests indicate that GM cars could meet the proposed standard; A 1971 internal proposal for tank-over-axle design; A 1959 GM patent on such a design claiming that it would position the tank “beyond the danger of damage.”

Panish and Spagnoli introduced all this evidence at trial through the testimony of Paul Mutty, GM’s chief fuel system designer.

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“It all establishes that GM was saying one thing internally and telling the government another,” says Panish. “They were telling the government it wasn’t feasible to meet the standard. Yet at the same time, all their documents and tests showed they could.” The plaintiffs’ team also delivered a bit of White House intrigue. Panish and Spignoli obtained a deposition given in an earlier GM case by the late Nixon staffer John Ehrlichman. In the deposition, Ehrlichman described a secret 1971 Oval Office meeting between him, President Nixon, and GM Chairman James Roche. During the meeting, Nixon and Roche allegedly discussed pending NHTSA safety standards. According to Ehrlichman, Roche expressed concern that the proposed standards would hamper GM’s ability to compete with foreign automakers. Ehrlichman testified that after the meeting, Nixon promptly ordered him to speak with the Secretary of Transportation, John Volpe, about tabling all pending standards, including the 30 mph fixed rear barrier test. That standard was never adopted— instead the NHTSA adopted the more lenient 30 mph “moving barrier test,” which approximates a car hitting a stationary car at 42 mph. Spagnoli adds that it was a huge battle getting this into evidence. “But after a lot of arguments, we were allowed to read Ehrlichman’s deposition into the record,” she says. Meanwhile GM called Douglas Toms, the head of NHTSA during the early 1970s, in an attempt to set the record straight. “He came in very determined to make it clear the he was a public servant who would never bend to any kind of pressure,” Spagnoli recalls. “But on crossexamination, he revealed that he had back-door conversations with GM people where he basically told them they need not worry about a higher test speed. He told them this at a time when their safety review board was about to order a tankover-axle design in 1973 in anticipation of a higher standard.” After that, GM tabled the design. Spagnoli says this all made a huge impression on the jury. “They said after the trial that they were amazed how polite the process is for government safety standards,” she says. Shapiro, however, says the Ehrlichman testimony should never have been admitted. “It’s hearsay and it’s unreliable (the plaintiffs) just tried to create this whole conspiracy with the Nixon administration,” he says. “But if you listen to the tapes (of the Nixon meeting) there was absolutely nothing about fuel systems. They were talking mostly about passive restraining systems like airbags and seat belts.” 1.10.6

Iveygate

The single most important moment in the case occurred when the trial judge allowed the Ivey memo into evidence. According to the plaintiffs, the 1973 memo was powerful evidence that GM conducted a cost– benefit analysis and decided that it was willing to risk human life than implement an $8 repair. In this memo, GM engineer Ed Ivey estimates that 500

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fatalities occur each year from gas tank fires and calculated that it would cost $200,000 to settle each resulting case. With 41 million GM cars on the road at the time, Ivey estimated the litigation cost at $2.40 per car. The plaintiffs also showed the jury a second memo, written by a GM engineer in 1971, which said it would cost GM $8.59 per car to implement a tank-over-axle design. The plaintiffs then connected the two memos with a series of other documents including: †

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A March 1973 directive that the cost– benefit ratio must be evaluated before GM released any components that exceed government standards; A June 6, 1973 memo assigning Ridenour to procure a summary of fire-related lawsuits against GM and assigning Mutty to get a breakdown of the cost of the tank-over-axle design; A document in Ivey’s personnel file stating that his job duties were to analyze designs, prepare mathematical calculations, and report the results.

This all drove the point home that instead of spending another $8.59 to put the tank over the axle, “GM said, ‘Forget it, we’ll fight the lawsuits,’ ” said Panish. But none of this would have been possible without getting the Ivey memo into evidence. A GM lawyer first discovered the Ivey memo in 1981. At the time, the lawyer warned in a memo that the documents that Ivey generated “are undoubtedly some of the potentially most harmful and most damaging were they ever to be produced.” But when the document was first obtained by the plaintiffs’ lawyers in 1984, they could not get it into evidence. Ivey gave deposition testimony in more than a dozen cases that he drafted the memo completely on his own and, to his knowledge, nobody else ever saw it. Without any evidence to contradict this, judges ruled that it was too damaging to admit. “So plaintiffs’ lawyers spent more than 10 years searching for evidence to explain why Ivey wrote the memo,” says Spagnoli. The plaintiffs’ bar found the crucial link in the 1981 notes of GM lawyers who interviewed Ivey in anticipation that his memo would eventually have to be disclosed. Those notes were discovered by lawyers working on an earlier case against GM. In the interview, Ivey stated that he wrote the memo “for Oldsmobile management” to “figure how much Olds could spend on fuel systems.” He also said he probably distributed the memo to Mutty and five other managers. Plaintiffs’ lawyers knew about these notes for quite some time, but GM characterized them as “deposition summaries” and used the attorney-work privilege to avoid producing them. But in 1998, a judge in a Florida case ordered them released. In that case, the Ivey memo was admitted for the first time. The judge in Anderson followed suit. “We truly owe a lot to the lawyers who’d gone ahead of us and uncovered a lot of stuff,” says Spagnoli. “In this case, it puts things into perspective that the Ivey memo was no orphan phantom project without meaning at GM.” Despite the interview notes, Ivey stuck to his story. So did his boss, Mutty, who testified at trial that he could not have seen Ivey’s memo because it was dated the last day of Ivey’s assignment in his department.

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So Panish quickly presented Mutty with Ivey’s employment records, indicating that his assignment did not change for another month. “It was almost humorous,” says Spagnoli. “He’s just gotten done saying he can’t remember things that happened 20 years ago and here is making an off-the-cuff comment that Ivey wrote the memo on a Friday. He was a likable witness, but this made him look like he was rehearsed. The odd inconsistencies showed a selective memory for things that helped his position, and I don’t think the jury believed him.” The plaintiffs’ lawyers enhanced the power of the Ivey memo by introducing evidence that Ivey got a 22.5 percent raise in 1983, three days before the memo was first produced to plaintiffs’ lawyers. In his previous 14 years at GM, Ivey’s average pay raise was between four and five percent each year. “This is at a time when there’s a gas crisis, an oil embargo, and a recession, and GM is laying off thousands of employees,” says Panish. “So to me it looks like he got a big raise to get amnesia. He testifies 13 times between 1984 and 1999 that he doesn’t remember why he prepared it and doesn’t have any knowledge that it was distributed to anyone.” Shapiro, however, insists that the plaintiff never properly connected the Ivey memo to OM’s decision on where to put the tank. “The fact is, there’s still absolutely no testimony from anybody that suggests that a design decision was ever based on the Ivey document,” he says. Even Ron Elwell, the ex-GM engineer the plaintiffs brought in to testify against GM, couldn’t link the memo to the decision-making, Shapiro adds. “This guy makes his living at $400 an hour testifying against GM and his speciality is the fuel system,” he says. “But even he couldn’t point to a single decision ever made or influenced by the Ivey document.” 1.10.7

Emotional Testimony

Testimonies from Anderson and her three oldest children sealed the compensatory damages award. For example, the children each spoke of their deformities and how they were teased by classmates and stared at by adults. “Alisha spoke movingly about waking up in the hospital and seeing that her hand had been amputated,” says Panish. “And her sister Kiontra talked about seeing Alisha go through the painful whirlpool treatments where they’d scrape off her dead skin each day.” Anderson talked about being hospitalized for serious burns of her own, but checking herself out of the hospital the next day to visit two of her children in separate Los Angeles County hospitals. “And she told of how she kept her house decorated for Christmas for five months until the children all came home to finally celebrate the holiday and the fact that they were all still alive,” Panish recalls.

2 Product Liability Around the World Product liability laws in the United States, as well as around the world, are in a constant state of change. Various states within the United States continue to make changes with regard to their product liability laws, and the rest of the world is constantly doing the same. When writing about the product liability laws around the world, it becomes nothing more than a snapshot in time as some countries will already be changing their laws by the time this book is published. In general, most of the rest of the world is unfortunately following the lead of the United States. When speaking to management teams around the world, I recommend they use the United States as the worst-case scenario when developing their product safety and liability prevention programs and efforts. If their systems could hold up to scrutiny in the United States and be defendable, then they should withstand an attack anywhere. The massive and record-breaking number of product recalls throughout most of the world in 2007 has also led to countless changes in product safety agencies and regulations in a number of countries, which then has a domino effect on the number of lawsuits initiated, followed by more stringent changes in the laws. Take as an example the country of Thailand.1 Prior to 2008 Thailand had no comprehensive law directly addressing product liability issues. As a result, claims for product liability in Thailand were usually made through use of the Consumer Protection Act and the Civil and Commercial Code. But these laws were viewed as inadequate to protect consumers and to deter the sale of unsafe products.

1

Reported in part by Siraprapha Rungpry and Michael Ramirez, Tilleke & Gibbins International Ltd.

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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In addition, there was a general belief that the sale of unsafe and substandard products was widespread in Thailand, actually becoming a dumping ground for recalled and otherwise rejected products, highlighted by various incidents in which people sustained serious injuries from defective products. Although it is debatable how much of the problem is related to the lack of comprehensive product liability laws, nonetheless it was hoped that implementation of specific product liability legislation in Thailand would help alleviate these concerns. The Product Liability Act B.E. 2551 (2008) was approved by the National Legislative Assembly in December 2007. The Act is designed to protect consumers who incur damage from defective products by imposing liability on those involved in the production and distribution of consumer products. The Act has been published in the Government Gazette and will become effective on February 20, 2009. The Act imposes strict liability on a business operator involved in the manufacture and/or sale of a defective product that then causes harm to a user. The Act defines an operator as any producer, outsourcer, or importer of the defective product; a seller who cannot identify the manufacturer, outsourcer, or importer of the product; and a person using the trade name, trademark, logo, wording, or showing by any means in a manner to cause people to understand that he/she is a producer, an outsourcer, or an importer. Thus, anybody involved in the chain of production and distribution could potentially face liability should the product sold contain a defect that causes harm to consumers. The operator is held liable if the product is defective within the meaning of the Act, regardless of whether the operator was negligent in making or selling the product. In other words, the operator can still be liable even if he/she has exercised reasonable care. Generally speaking, the Act addresses three specific types of product defects: manufacturing defects, design defects, and warning defects (failure to warn). Manufacturing defects occur where a product deviates from its intended design or specifications, while design defects occur when the product design itself renders the product dangerous or unsafe for its intended use. Warning defects refer to situations in which directions for use or storage, warnings, or information about the product are not provided, or are provided but are not reasonable given the nature of the product and the ordinary usage/storage that may be expected of the product. Under the Act’s strict liability rule, an injured user need only prove that he/she was injured or suffered damage from the defective product while using it in the way it was intended to be used. The injured party does not have to establish that the damage was the result of an act of any particular operator involved. Moreover, product liability cannot be waived or limited by way of contract or by any waiver or limitation of liability statement given by an operator. Further, if a court finds an operator liable, the scope of damages available to an injured party may be broader than those available under traditional tort or contract theories. For example, under the Act a court has the discretion to award punitive damages and compensation for mental anguish if required conditions are met. While the Product Liability Act introduces the strict liability standard, it also provides several defenses for a defendant operator. For example, an operator will not be

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liable if it can prove that the product was not defective, that the injured party was already aware that it was defective but used it anyway, or that the damage was due to improper use or storage of the product. The Act also provides defenses for producers of custom-made products and component producers, who generally will not be liable for the damage to consumers if they can prove that the defect is due to the specifications or design of the final product provided to them by the outsourcer or producer. With implementation of the Act less than one year away, operators are advised to begin planning now. Companies that manufacture, sell, import, or even those who license technologies or trademarks to others for production, import, or product sales, should carefully assess litigation risks and related costs. In addition, operators should conduct evaluations and reviews of their quality control processes, product designs, and consumer warnings. It is also advisable for companies in Thailand to consider and evaluate the need for product liability insurance. Another example can be found in Canada, as reported by the Canadian Press in April of 2008: Prime Minister Stephen Harper has unveiled a plan to overhaul Canada’s product-safety laws after recalls of tainted pet food and lead-laden children’s toys last year triggered widespread concern. The proposed legislation includes stiffer penalties—up to $5 million and two years in prison—for firms that sell harmful products. It would also allow the health minister to invoke mandatory recalls when companies fail to act on their own, and force firms to report injuries, illnesses, and defects stemming from their products. “We’ve all seen the stories in the news about food contaminated with bacteria, medicines containing undisclosed drugs, or children’s products manufactured with lead or other hazardous substances,” Harper told a news conference Tuesday. “Canadians rightly expect their national government to police the safety of consumer products.” He said that while consumer products are generally safe, the system could be “significantly better.” Most Canadian manufacturers, importers and sellers are “conscientious corporate citizens who take their responsibilities for consumer safety seriously,” Harper said. “There are a few, however, which care more about the almighty dollar than the safety of their customers. They cut corners and play fast and loose with safety.” “To these outfits I say: be warned, you will soon face severe punishment if you willfully expose Canadians to danger.” Under the proposed legislation, serious offences carry a fine of up to $5 million and as much as two years in prison. Less serious offences carry a maximum fine of $250,000 and up to six months in prison for first-time offenders. Fines for subsequent offences could climb as high as $500,000 and 18 months in prison. The government also plans to hire more inspectors to enforce the proposed measures.

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The following sections summarize where product liability law currently stands and how it works in various other countries around the world, but again, it really only represents a snapshot in time as constant changes are always taking place. 2.1

UNITED STATES —By Harvey L. Kaplan and John F. Kuckelman (Shook, Hardy & Bacon L.L.P)2

Product liability claims may be brought under theories of strict liability, negligence, or breach of warranty. A plaintiff bringing a product liability claim must prove that a product was defective due to an unreasonably dangerous condition or characteristic. There are three categories of product defect: design defect, manufacturing defect, and warnings defect (failure to adequately warn of risks and dangers associated with product use). A product liability plaintiff may recover for injuries to the person, including death and damage to property. 2.1.1

State Schemes of Contribution

In limited circumstances, compensation systems have been set up and operated by the federal government. For example, in 1986 Congress created the National Vaccine Injury Compensation Program to compensate individuals or families of individuals who have been injured by childhood vaccines. To obtain compensation, a party must file a claim with the U.S. Court of Federal Claims. A physician then reviews the claim on behalf of the government to determine whether it meets the criteria for compensation. The initial decision regarding the amount of compensation is made by a “special master.” A party may appeal the special master’s decision to the Court of Federal Claims and then to the Federal Circuit Court of Appeals. A party may sue the manufacturer of a vaccine only if the vaccine is not covered by the National Vaccine Injury Compensation Program or, for vaccines covered by the program, only after the party has sought relief through the National Vaccine Injury Compensation Program and been denied compensation or received an award the party rejects. 2.1.2

Parties that Bear Responsibility

In most jurisdictions, product liability claims may be asserted against any entity involved in making a product available to the consumer, including manufacturers, wholesalers, distributors, and retail suppliers of the product. Some jurisdictions have so-called “innocent seller” statutes or case law that protect retailers from liability arising out of their sale of defective products provided certain conditions are met, such as the availability of jurisdiction over the manufacturer, the availability of adequate remedy against the manufacturer, lack of knowledge of the defect by the seller, and inability by the seller to discover defectiveness of the product. 2

This first appeared in the International Comparative Legal Guide to Product Liability 2007 (Global Legal Group).

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Duties to Recall

A majority of jurisdictions have held that, in the absence of a statutory requirement or action by a governmental regulatory authority, a manufacturer has no duty to recall a product or take steps to remedy defects discovered after the product has already been sold. However, courts in a minority of jurisdictions, including Arkansas, Colorado, Delaware, Hawaii, Illinois, Iowa, Kansas, Louisiana, Minnesota, New Jersey, New York, North Carolina, Texas, Washington, and Wisconsin, have held that a manufacturer does have a post-sale duty to recall or repair a product.

2.1.4

Criminal Sanctions

Criminal prosecution is possible in connection with product liability claims, particularly where there has been an alleged violation of federal or state laws regulating the product at issue.

2.1.5

Proving the Burden of Fault

Generally, the plaintiff bears the burden of proving all elements of a product liability claim. Although the elements of a strict liability claim vary according to state law, a plaintiff typically must prove that the defendant’s product caused or contributed to cause the plaintiff’s injury; the product was defective, that is, unreasonably dangerous, at the time of the plaintiff’s injury; the defective condition of the product existed at the time the product left the hands of the defendant; and the defendant’s product was the proximate, or legal, cause of the plaintiff’s injury. Under the negligence theory, a plaintiff must prove these elements and that the defendant knew or should have known of the alleged product defect.

2.1.6

Proof of Causation

A plaintiff must prove both actual and proximate causation. Actual causation entails two components: general and specific causation. To establish general causation, the plaintiff must prove that the defendant’s product is capable of causing the type of injuries alleged. To establish specific causation, the plaintiff must prove that the product did cause the particular injuries in the plaintiff. Generally, to establish actual causation, a plaintiff must offer expert testimony that, to a reasonable degree of medical probability, the defective nature of the defendant’s product caused or substantially contributed to cause the plaintiff’s alleged injuries. To establish proximate causation, also referred to as legal causation, a plaintiff must establish that the injury is the natural and probable consequence of the defendant’s conduct. The concept of proximate causation acts as a limit on the extent of a defendant’s liability. A defendant may not be held liable for every consequence that follows the defendant’s action; rather, the defendant’s liability is limited to the natural and probable consequences of its action or inaction.

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Market Share Liability

In the majority of jurisdictions, a plaintiff bears the burden of proving that the defendant manufactured the product that caused the plaintiff’s injury. However, a few jurisdictions have adopted market share liability. It was first adopted by the California Supreme Court in a 1980 case involving the synthetic estrogen drug diethylstilbestrol, also known as DES, which was manufactured by as many as 300 manufacturers between the 1940s and 1970s. Market share liability has subsequently been adopted in at least five other jurisdictions in the United States, including Florida, New York, Michigan, Washington, and Wisconsin. Under market share liability, a plaintiff may recover for injuries caused by a product identically manufactured by more than one manufacturer even though it is not possible to determine the identity of the manufacturer of the particular unit that caused the plaintiff’s injury. The legal requirements for recovering under the market share theory of liability vary in each of these jurisdictions. For example, in California, a plaintiff must join a “substantial share” of manufacturers and each defendant can be held liable for its share of the market unless it proves it could not have manufactured the product that actually caused the plaintiff’s injury. In New York, a plaintiff must also join a “substantial share” of manufacturers and each defendant may be held liable for its share of the national market. However, because the New York court adopted market share liability as a method of apportioning defendants’ liability according to their alleged total culpability, a defendant may not exculpate itself even if it can show that it did not manufacture the product that actually caused the injury. In Florida, the plaintiff must show that she has made a genuine attempt to identify the manufacturer responsible for her injury, but has no burden to join a substantial share of manufacturers. Each manufacturer joined as a defendant in Florida is presumed to have an equal market share (as determined by the number of defendants in the case) unless it proves that its actual market share was less. 2.1.8

Failure to Warn

Where liability is premised on a defendant’s failure to warn of risks or dangers associated with use of a prescription drug, the learned intermediary doctrine provides that the defendant manufacturer discharges its duty by warning the prescribing physician of the dangers associated with use of the product. It is then the learned intermediary’s responsibility to warn the user. The learned intermediary doctrine applies in cases involving prescription drugs because these products can only be obtained through a licensed physician, who is in a superior position to understand and evaluate the warnings in light of the patient’s medical condition and background. The learned intermediary doctrine has also been held to apply in cases involving heavy industrial equipment where an employer acts as the intermediary in instructing employees regarding safe use of the product. 2.1.9

Statutes of Limitation

A plaintiff’s claim will be barred if it is not brought within a certain period of time after the plaintiff is injured. Statutes of limitation vary according to jurisdiction and

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depending on the theory of liability, but can range in duration from one to six years for personal injury claims. Many states apply a so-called “discovery rule,” which provides that the statute of limitation will not begin to run until a plaintiff knows that he has a cause of action. A plaintiff typically has knowledge of a cause of action when he knows, or should know, that he has been injured and that the product at issue may have caused his injury. A minority of jurisdictions liberally interpret the “discovery rule” to prevent the running of the statute of limitation until the plaintiff knows, or should know, that he has been injured, that the product at issue caused the injury and that the defendant engaged in wrongful conduct. 2.1.10

Statutes of Repose

In contrast to statutes of limitation, statutes of repose provide that a claim will be barred if not brought within a specific number of years after the product was manufactured or sold, regardless of when the plaintiff’s injury occurs. Time periods for statutes of repose are typically longer than statutes of limitation, but the “discovery rule” generally does not apply to statutes of repose. Thus, statutes of repose are viewed as an absolute time bar on a claim. 2.1.11

Intervening and Superseding Cause

A defendant in a product liability action may assert as a defense that the plaintiff’s injury was caused by the intervening conduct of a party other than the defendant. The intervening conduct may be that of another defendant, of a non-party or of the plaintiff himself (see Section 2.1.12). However, intervening conduct is generally a defense to a product liability claim only if the conduct is also a “superseding cause.” Most courts hold that intervening conduct is a superseding cause where the conduct is such that a manufacturer could not be expected to guard against such conduct in the design of the product. Examples of intervening superseding causes include failure to properly maintain a product, negligent use of the product, use of a product for a purpose not intended or reasonably foreseen by the manufacturer, failure to inspect a product, failure to follow instructions regarding the installation of a safety device, failure to comply with a product recall, alteration of a product, or criminal action. 2.1.12

Comparative Fault/Contributory Negligence

Formerly, many jurisdictions completely barred recovery by a plaintiff where the plaintiff’s own negligence caused, or contributed to cause, the plaintiff’s injury. Most jurisdictions no longer bar recovery by a plaintiff who is contributorily negligent; rather, they apply comparative fault under which the plaintiff’s recovery is reduced if the plaintiff’s own conduct contributed to the injury. Some jurisdictions impose “pure” comparative fault to reduce a plaintiff’s recovery by the percentage of fault attributed to the plaintiff’s negligence. Other jurisdictions apply “modified” comparative fault, which reduces a plaintiff’s recovery by the percentage of fault assigned to the plaintiff, but bars recovery if the percentage of fault assigned to the

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plaintiff reaches a certain level. For example, in some jurisdictions applying “modified” comparative fault, a plaintiff may recover provided her percentage of fault is less than the percentage of fault attributed to the defendant(s). Under this system, a plaintiff may not recover if her fault is equal to that of the defendant(s). In other jurisdictions applying “modified” comparative fault, a plaintiff may recover provided that the percentage of fault attributed to her does not exceed the percentage of fault attributed to the defendant(s). Thus, a plaintiff may still recover where the plaintiff’s fault is equal to that of the defendant(s). 2.1.13

Assumption of the Risk

In many jurisdictions, it is a defense to a product liability claim if the plaintiff knew of a product defect, recognized the danger posed by the product, but nevertheless proceeded to use the product and was injured. This defense is different from contributory negligence in that it applies a subjective standard, that is, what the plaintiff actually knew, rather than the objective standard applied to a contributory negligence determination, that is, whether the plaintiff acted as a reasonable person under the circumstances. 2.1.14

Preemption

Where a governmental or regulatory body has promulgated rules and regulations regarding product safety, some courts hold that product liability claims that, if successful, would require additional conduct by the manufacturer, are preempted by the governmental or regulatory rules and regulations. 2.1.15

State of the Art

In negligence actions, the fact that a product was manufactured according to the state of the art, that is, the level of scientific and technical achievement in the relevant field, is relevant evidence that the manufacturer exercised due care. Evidence that a manufacturer complied with the state of the art may also be relevant in strict liability cases, particularly in a design defect case, where such evidence may be relevant to determine the feasibility of an alternative design, consumer expectations, or the standard for design defect. State-of-the-art evidence is, however, inadmissible in some jurisdictions, including Illinois, Montana, North Dakota, and Pennsylvania. Generally, in jurisdictions where evidence of the state of the art is admissible, the burden of proof is on the defendant to prove that it complied with the state of the art. However, in jurisdictions that require a plaintiff asserting a design defect theory to offer proof of a safer, feasible alternative design, the burden of demonstrating the relevant state of the art is on the plaintiff. 2.1.16

Regulatory/Statutory Compliance Defense

In a majority of jurisdictions, a manufacturer’s compliance with regulatory and statutory requirements is evidence of due care or lack of defect, but is not conclusive. In a

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small number of states, including Arkansas, Colorado, Kansas, North Dakota, Tennessee, Utah, and Washington, a manufacturer’s compliance with regulatory and statutory requirements creates a rebuttable presumption that the product is not defective. In Michigan, a manufacturer of a prescription drug is not liable and the product is not defective or unreasonably dangerous if the drug and its labeling were approved by the U.S. Food and Drug Administration (FDA). 2.1.17 Relitigating Issues of Fault Provided in Separate Proceedings by Different Claimants A plaintiff is not stopped from litigating issues of fault, defect, or the capability of a product to cause a certain type of damage where another plaintiff has unsuccessfully litigated the same issue(s). However, in some circumstances, where an issue is decided against a defendant in one proceeding, the defendant may be precluded from relitigating the issue in future proceedings involving different plaintiffs. 2.1.18

Trials by Judge or Jury

In both federal and state court, either party may demand a trial by jury. Most federal juries are comprised of six persons and two alternates and verdicts must be unanimous. State court juries commonly comprise 12 persons and the number of jurors to render a verdict varies. In some states, unanimity is required, while others require 9 of 12 or 10 of 12. In state courts using six-person juries, some require five of six jurors to render a verdict. 2.1.19

Court’s Use of Special Experts

A federal court may appoint a “special master” who may serve as a referee, auditor, examiner, or assessor to assist the court with complicated issues. Rule 53(b) of the Federal Rules of Civil Procedure provides that reference to a master “shall be the exception and not the rule.” Where trial is by jury, a master may be appointed only where the issues are complicated. Where trial is by a judge, the court must show that some “exceptional condition” requires appointment of a master, except in matters of account and difficult computation of damages. 2.1.20

Procedure for Class Actions

A federal court may “certify” or allow a class action to go forward if the requirements of Rule 23 of the Federal Rules of Civil Procedure are met. Rule 23(a) provides that four prerequisites must be satisfied for a suit to be certified as a class action. First, the class of parties must be so numerous that joinder of all members of the class is impracticable. Second, there must be questions of law or fact common to all members of the class. Third, the claims or defenses of the parties who wish to bring the claim on behalf of the class must be typical of the claims or defenses of

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the class. Finally, the parties who wish to bring the claim on behalf of the class must be capable of fairly and adequately protecting the interests of the class. If the four prerequisites are satisfied, Rule 23(b) provides that an action may be allowed to proceed as a class action in the following three circumstances: 1. The prosecution of separate actions by individual members of the class would create a risk of inconsistent or varying adjudications with respect to individual members of the class which would establish incompatible standards of conduct for the defendant, or adjudications with respect to individual members of the class would be, as a practical matter, dispositive of the interests of other members of the class who are not parties to the action or would substantially impede or impair their ability to protect their interests. 2. The defendant has acted or refused to act on grounds generally applicable to the entire class. 3. Questions of fact or law common to the members of the class predominate over questions affecting only individual members and a class action is superior to other methods for the fair and efficient adjudication of the controversy. Rule 23(b)(3), directs the court to consider the following factors in making a determination whether common questions of fact or law predominate over individual issues and whether a class action would be superior to other methods for adjudication of the controversy: 1. The interests of members of the class in individually controlling the prosecution of separate actions; 2. The extent and nature of any litigation concerning the controversy already commenced by members of the class; 3. The desirability or undesirability of concentrating the litigation of the claims in the particular forum; and 4. The difficulties likely to be encountered in the management of the class action. If a court determines that the provisions of Rule 23 are satisfied, it may certify the proposed class and allow the representative plaintiffs to litigate the case as a class action. Typically, the representative plaintiffs must provide notice to potential members of the class that they may opt out of the class and pursue their claim individually. If a class member fails to opt out of the class, the class member becomes part of the class action and is bound by its result. 2.1.21

Claims brought by Representative Associations

Generally, a representative organization, such as a consumer association, has no standing to file a product liability claim for injuries sustained by its members. However, some such organizations file petitions with governmental regulatory authorities requesting that the regulatory authority take action against manufacturers, such as requiring a recall of the product or imposing additional safety standards.

2.1

2.1.22

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Length of Time to go to Trial

The length of time it takes to for a case to get to trial varies by jurisdiction. In the federal courts, during the 12-month period ending March 31, 2006, the overall median time to trial was 22.2 months (see Statistical Tables for the Federal Judiciary, March 31, 2006 at www.uscourts.gov/caseload2006/tables/C05mar06. pdf). However, there is great variation within the federal courts during this period, ranging from only 8.5 months in the Western District of Wisconsin and 9.6 months in the Eastern District of Virginia, to 33.5 months in the Eastern District of New York, 34.5 months in the District of the District of Columbia, and 63.0 months in the Western District of New York. The length of time it takes to get to trial in state court varies by jurisdiction, but comprehensive statistics are unavailable. 2.1.23

Summary Judgment Procedure

Judges in federal and state courts may use summary judgment procedure to dispose of specific issues or an entire case prior to trial. Rule 56 of the Federal Rules of Civil Procedure and comparable rules in state courts allow a court to enter summary judgment as to specific issues or the entire case where no genuine issue of material fact exists and the judgment may be entered as a matter of law. Courts may use summary judgment proceedings or other pretrial hearings to make determinations regarding the admissibility of expert testimony. Where expert testimony is held inadmissible, these proceedings, referred to as “Daubert” hearings in federal court, may make trial unnecessary if a party is unable to meet their burden of proof without expert testimony. In contrast to summary judgment, courts may also hold separate trial proceedings regarding preliminary issues, the results of which determine whether it is necessary to try remaining issues. Rule 42 of the Federal Rules of Civil Procedure and comparable rules in state courts allow a court, where convenient or to avoid prejudice, or where conducive to expedition and economy, to order the separate trial of any claim or any separate issue. In such proceedings, the court may go beyond matters of law and make findings of fact. Additionally, the constitutional right of the parties to trial by jury applies in the separate proceedings. Commonly known as “bifurcation,” this procedure is frequently sought by defendants facing claims for punitive damages to prevent the jury from considering issues such as the defendant’s wealth and other prejudicial evidence irrelevant to the determination of liability and actual damages. In such instances, defendants typically request that the court try issues related to liability and actual damages first and then, only if actual damages are awarded, to consider evidence relevant to punitive damages in a separate proceeding. 2.1.24

Procedure for Appeals

Before appealing a judgment or order to an appellate court, a party may request, by motion, that the court that entered the order or judgment reconsider its order or judgment in limited circumstances, such as where new evidence has been discovered that

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could not have been previously discovered or where fraud has been committed upon the court. Appeals may generally be taken only from a “final decision” (see 28 U.S.C. §1291). A final decision is one that settles the rights of the parties and disposes of all issues in the case. There are, however, exceptions under which an “interlocutory appeal,” which is an appeal from a decision that is not final, may be taken. Such instances include orders granting or denying injunctions, orders involving a controlling question of law if an immediate appeal will advance the ultimate termination of the litigation, orders constituting a clear abuse of discretion where the court’s legal duty is plainly established, reference of an issue of state law to a state appellate court, and other limited circumstances (see 28 U.S.C. §1292). Additionally, an order granting or denying certification of a class action, although not a final decision, may be appealed pursuant to Rule 23(f) of the Federal Rules of Civil Procedure. 2.1.25

Admission of Expert Testimony

Parties may present expert testimony in both federal and state courts where such testimony will be helpful to the judge or jury in evaluating the evidence. The admission of expert testimony in federal courts is governed by Rule 702 of the Federal Rules of Evidence. Rule 702 provides that an expert may testify if the expert is qualified by knowledge, skill, experience, training, or education and if the expert’s proposed testimony is based upon sufficient facts or data, is the product of reliable principles and methods, and if the principles and methods have been reliably applied to the facts of the case. Additionally, in evaluating the qualifications of experts and the reliability of expert opinions, federal courts are guided by the U.S. Supreme Court’s decision in Daubert v. Merrell Dow Pharms., Inc., 509 U.S. 579 (1993). The Daubert decision sets forth several factors to guide courts in determining whether an expert’s opinions are reliable, including whether the expert’s method or theory has been tested, whether the method or theory has been subjected to peer review and publication, the rate of error of the technique or theory, the existence of standards and controls applicable to the method or theory, and whether the method or theory has been generally accepted in the scientific community. State courts have rules similar to Rule 702 and many apply the Daubert decision. However, some state courts still apply the “general acceptance” standard set forth in Frye v. United States, 293 F. 1013 (DC Cir. 1923), which was rejected by the Supreme Court in Daubert. Under the Frye test, an expert’s opinion is admissible if the technique employed by the expert is “generally accepted” as reliable in the relevant scientific community. In both federal and state courts, parties may take the pretrial depositions of factual and expert witnesses. Rule 30 of the Federal Rules of Civil Procedure limits the length of a deposition to one day of seven hours, unless otherwise agreed by the parties. State court rules regarding depositions vary by jurisdiction, but typically allow broad latitude for the deposition of both factual and expert witnesses.

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Rule 26(a)(2) of the Federal Rules of Civil Procedure requires all parties to disclose the identity of all experts that may be used at trial, including a written report containing a complete statement of all opinions to be expressed and the reasons and bases in support of the opinions, the data, or other information considered by the expert in forming the opinions, exhibits to be used in support of the opinions, the qualifications of the expert, including a list of all publications authored by the expert within the preceding ten years, the compensation to be paid to the expert, and a list of all other cases in which the expert has given testimony at deposition or at trial in the previous four years. State court rules regarding the disclosure of expert reports vary by jurisdiction. The Federal Rules of Civil Procedure and comparable rules in state courts are designed to prevent parties from “ambushing” adversaries at trial with unknown evidence. Accordingly, parties are required to disclose information to be used at trial, including documentary evidence, before trial begins. Rule 26(a)(1) requires all parties, at the outset of a case, without awaiting any discovery requests, to provide copies or a description by location and category of all documentary evidence the party may use to support its claims or defenses. Moreover, the parties are under a continuing obligation to supplement their disclosure of such information as it becomes known to them throughout the case. Although courts had applied Rule 26(a)(1) to require disclosure of information that is stored electronically, the Federal Rules of Civil Procedure have recently been amended to specifically include electronic information within the information that must be disclosed at the outset of a case. The changes to the rules were heavily influenced by the Sedona Conference, which is a research and educational institute dedicated to the advancement of law and policy related to complex litigation. Members of the Sedona Conference include leading jurists, lawyers, experts, and academics, who convene regularly in conferences to discuss best practices, guidelines, and principles related to complex litigation issues, including discovery of electronic information. The revised rules were also heavily influenced by the body of case law that had developed in recent years regarding discovery issues related to electronic information. Most notably, Judge Shira A. Scheindlin, a federal district judge in the U.S. District Court for the Southern District of New York, issued a series of opinions in Zubulake v. USB Warburg LLC regarding discovery of electronic information. The revised rules became effective on December 1, 2006. Rules 26 through to 37 of the Federal Rules of Civil Procedure provide numerous discovery tools which a party may use to obtain relevant information from an adverse party. Parties may discover information relevant to the case by taking depositions of factual and expert witnesses, propounding written interrogatories, requests for production of documents and things, requests for admissions, and physical and mental examinations of a party. Finally, federal courts and most state courts require the parties, in advance of trial, to exchange written witness and exhibit lists, as well as copies of all exhibits that may be used at trial.

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Statutes of Limitations

A plaintiff must file suit within the applicable statute of limitations. Statutes of limitation applicable to product liability actions vary by jurisdiction and may range from one to six years. A suit is commenced when the plaintiff files the complaint, also called a petition in certain jurisdictions, which contains the relevant allegations and a request for relief. When the complaint is filed, a summons is issued commanding the defendant to appear before the court to answer the complaint. Rule 4(m) of the Federal Rules of Civil Procedure provides that a complaint will be dismissed if plaintiff does not serve the complaint and the summons on the defendant within 120 days of issuance of the summons. A defendant must answer the complaint within 20 days of service of the summons and complaint. State courts have similar rules and similar timeframes, although the time to answer is 30 days in many jurisdictions. Alternatively, a plaintiff in federal court may request that a defendant waive the requirement of formal service of the summons in order to avoid the costs associated with such service. If a defendant refuses to waive formal service and the plaintiff subsequently serves the defendant with the complaint and summons, the defendant must pay the expenses associated with formal service of the summons. Where a defendant agrees to waive service of the summons, the defendant has 60 days after signing the waiver of service to answer the complaint, rather than the usual 20-day period in which to answer where formal service is made. After the plaintiff files the complaint and the defendant files its answer, federal courts and most state courts issue scheduling orders that govern the discovery, pretrial, and trial phases of the case. Statutes of limitation begin to run when a claim accrues. The time of accrual varies depending on jurisdiction, but generally a claim accrues when a plaintiff has been injured and knows the cause of his injury. Statutes of limitation are “tolled” or suspended, where a plaintiff has not reached the age of majority, is mentally incapacitated or, in some jurisdictions, is imprisoned. The limitations period begins to run again when the plaintiff reaches the age of majority, when the mental incapacitation is lifted or when the period of imprisonment ends. Statutes of limitation are commonly tolled where a defendant commits an ongoing fraud that prevents the plaintiff from realizing that he or she has been injured. 2.1.27

Recoverable Damages

In a product liability claim, a plaintiff may recover for personal injury and wrongful death, including pain and suffering, medical expenses, loss of income, loss of financial support, and loss of consortium. A product liability plaintiff may also recover for damage to property, including damage to the product itself, and damage to other property. Finally, a product liability plaintiff may recover punitive damages, which are discussed below. Product liability defendants have been ordered to pay for medical monitoring of plaintiffs to detect the future development of latent injuries or diseases. There is, however, a recent trend against medical monitoring in the absence of physical injury.

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Punitive damages are recoverable in product liability actions in most jurisdictions. A plaintiff typically must prove, by clear and convincing evidence, that a defendant acted willfully, wantonly, or with malice in order to recover punitive damages. In numerous jurisdictions, punitive damages are not recoverable unless actual damages are awarded. The U.S. Supreme Court has recently struck down a punitive damages award that was 145 times the amount of the compensatory damages award on the ground that such an award was an arbitrary deprivation of property in violation of the defendant’s constitutional right to due process [State Farm Mutual Automobile Insurance Co. v. Campbell, 538 U.S. 408 (2003)]. The Court noted that any award 10 times the amount of compensatory damages or larger would likely be unconstitutional on due process grounds. The Court also held that certain factors, such as the defendant’s wealth or conduct unrelated to the injury at issue, may not be considered in determining the amount of a punitive damages award. Numerous jurisdictions have enacted limits on the amount of punitive damage awards, including Colorado, Connecticut, Florida, Kansas, Oklahoma, Texas, and Virginia. Additionally, some states require that portions of punitive damage awards be paid to the state, including Georgia and Iowa. There is not a limit on the amount of monetary damages recoverable from one manufacturer. However, some states limit the number of punitive damage awards, but not the amount, to one award that may be recovered from a single defendant for any act or omission, regardless of the number of claims that arise. 2.1.28

Updates

On December 1, 2006, the Federal Rules of Civil Procedure were revised to specifically address discovery of “electronically stored information.” Rule 34 indicates that electronically stored information is broadly construed and includes “images and other data or data compilations stored in any medium from which information can be obtained (and) translated, if necessary, by the respondent into reasonably usable form.” Rule 26(a)(1) requires the parties to include in their initial disclosure “a copy of, or a description by category and location of, all documents, electronically stored information, and other tangible things that are in the possession, custody, or control of the party.” This revision requires counsel to understand and be prepared to disclose a party’s system of electronic document management early in a case. Rule 26(f) requires the parties “to discuss any issues relating to preserving discoverable information” at the outset of the case. Rule 26(f) also contains new paragraphs (3) and (4), which require the parties to confer at the outset of the case regarding “any issues relating to disclosure or discovery of electronically-stored information, including the form in which it should be produced,” and “any issues relating to claims of privilege or protection as trial-preparation material, including—if the parties agree on a procedure to assert such claims after production—whether to ask the court to include their agreement in an order.” Rule 34(b) allows a party requesting production of electronically stored information to designate the form in which it wants the information produced.

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Moreover, if the request does not specify the form of production, the responding party must produce the information in the form in which it is ordinarily maintained or in a form that is reasonably usable. Under Rule 26(b)(2), a responding party need not produce electronically stored information from sources that it identifies as not reasonably accessible because of undue burden or cost. If the requesting party seeks to compel discovery of such information, the responding party has the burden of showing that the information is not “reasonably accessible,” and the court may order such discovery if “good cause” exists. Rule 26 also provides that “[t]he court may specify conditions for the discovery,” suggesting that the court may shift costs to the requesting party. The new rules also include a “safe harbor” in Rule 37 which provides that, “absent exceptional circumstances, a court may not impose sanctions . . . under these rules on a party for failing to provide electronically stored information lost as a result of the routine, good-faith operation of an electronic information system.”

2.2

AUSTRALIA —By Dr Jocelyn Kellam and Colin Loveday (Partners, Clayton Utz)

It has been 15 years since both strict liability laws based upon the EC Directive for Defective Products 1985 (the EC Directive) were introduced into Part VA of the Trade Practices Act (TPA), 1974 (Cth) and representative actions were introduced into the Federal Court in 1992. In that time, there have been at least 25 decisions of superior courts concerning the meaning of Part VA and at least 23 product liability representative actions in the Federal Court (and in excess of 110 decisions relating to the class action provisions generally). The experience of the last 15 years shows Australian product liability law to be a patchwork of causes of action. Australia’s product liability law is a mixture of common law and statutory causes of action. Actions for compensation frequently plead negligence and/or breaches of the TPA. Surprisingly also, the tort of breach of statutory duty also seems to be undergoing somewhat of a renaissance in the product liability context. Australian product liability law has also been complicated by civil liability reforms, which followed a perceived public liability crisis following the collapse of one of Australia’s largest insurers and a medical defense organization, and conjecture surrounding difficulties involved in securing public liability insurance. Whatever the merits or otherwise underlying the reforms, they have been inconsistently implemented in the law of the Commonwealth and the States and territories, adding a further level of inconsistency. Further, leaving aside any value judgments as to what rights to compensation a consumer injured by a defective product should have, it is difficult to argue against propositions that different categories of consumers suffering the same injury should have the same causes of action, receive the same compensation, and that the law should be coherent in content and structure. Measured against these simple propositions, however, Australian product liability laws fail.

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As a result of past piecemeal law reform including the recent civil liability reforms, Australian product liability laws are an overlapping mishmash of multiple causes of action at common law and State and Federal statutes with different standards of liability, remedies, and measures of quantum. Accordingly, any litigation must involve resolution of the factual disputes between the parties and issues of expert evidence, but also lengthy consideration of matters of law to the literal cost of both plaintiffs and defendants alike. At the very least, such complexities will likely give rise to issues of election in product liability litigation in the future. At worst, it will encourage “forum shopping,”3 which the Australian High Court has thought important to discourage.4

2.2.1

Causes of Action Under the TPA

Two parts of the TPA give consumers rights against manufacturers of defective products. Part V Division 2A and Part VA of the TPA are “strict liability” provisions. Under both parts, a plaintiff need not prove fault. In the former a plaintiff must prove that the goods were not fit for their intended purpose, or were not of merchantable quality. In the latter, a plaintiff needs to prove that the goods were defective, namely, that they were not as safe as persons generally are entitled to expect them to be. Part V Division 2 also gives consumers a cause of action against a retailer of goods by implying statutory warranties into the contract of supply. These provisions only apply to supplies by corporations in trade and commerce for constitutional reasons. Supplies that are not in trade or commerce, by unincorporated bodies or private transactions, do not fall under the provisions and are governed by the laws of the states and territories. Although some state Fair Trading Acts (New South Wales and the Northern Territory) imply consumer warranties equivalent to those in Part V Division 2A of the TPA others do not. As a result, depending upon the place of the wrong, consumers injured in different states have different rights. Until 2006, product liability claims involving a failure to warn alleged misleading and deceptive conduct and a breach of sections 52 (misleading conduct) and 53 (misrepresentation) of the TPA. The Trade Practices Amendment (Personal Injuries and Death) Act 2006 (Cth), however, provides that these causes of action are no longer available in personal injury claims. An exception is provided if the death or personal injury results from smoking or other use of tobacco products. Again, however, equivalent reform has not been made to all State Fair Trading legislation, so causes of action remain available under such state law in Western Australia, Northern Territory, ACT, and South Australia (but are not available in Tasmania, New South Wales, Victoria, and Queensland).5

3

However, compare the opposing views (with related commentary) of Kirby J (at 118) and the other members of the High Court (at 128) about the desirability of forum shopping: Regie Nationale des Usines Renault SA v. Zhang [2002] HCA 10. 4 Breavington v. Godleman (1987) 169 CLR 41 per Mason CJ at 73. 5 As of 2007.

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Different Elements of Liability

Part V Division 2A and Part VA contain different elements of liability in three respects: they apply to different goods, the standard of defect is unalike, and the defenses are not uniform. First, they do not apply to the same goods. Part VA applies to goods that have a defect. “Goods” is broadly defined to include ships, aircraft, and vehicles, animals including fish, minerals, trees, and crops, and gas and electricity. The operation of Part V Division 2A, however, is more restrictive and it only applies to goods ordinarily acquired for personal domestic and household use. (As another example of inconsistency, retailers are also potentially liable for a broader class of goods under Part V Division 2 including all goods with a price of less than $40,000. Leaving aside any value judgment as to what level of rights consumers should have, in circumstances where retailers have a right of indemnity against manufacturers under the TPA in respect of a breach of the statutory warranties, there seems no logical reason why consumers should not also have rights against manufacturers in respect of goods with a price of less than $40,000). The TPA also includes two tests for when a product is defective—first, statutory warranties being merchantable quality and fitness for purpose in Part V Division 2A (and Division 2) and second, community expectations of safety in Part VA, which perhaps have a tortious flavour.6 In highlighting the difference between “defect” in sales law and tort, one judge has said: “One man’s meat is another man’s poison. The scribbling block bought for a few cents at the supermarket might serve very well for the correspondence of the artisan, but it would not have done for the Duke. . . We should adopt the view that has now been three times expressed in the House of Lords, beginning with the Junior Books case itself, that as regards goods which are merely defective in quality as opposed to dangerous manufacturers are under no general duty of care towards consumers.”7 Australian courts have taken an expansive approach in deciding when goods are not of merchantable quality or fit for purpose. It is not determinative that the goods have not yet failed.8 A product that is subject to a significant additional risk of premature failure by reason of the materials used in the manufacturing process may not be reasonably fit for its intended purpose. In determining whether goods meet community expectations of safety under Part VA, consistent with the EC Directive, all circumstances are to be taken into account including the manner in which the goods have been marketed, their purposes,

6

Query whether a claim under Part VA involves a “tortious act or omission” for the purposes of leave to serve out of the jurisdiction—see Borch v. Answer Products Inc [2000] QSC 379. 7 See Brooking J. Minchillo v. Ford Motor Company of Australia [1995] 2 VR 594 at 598– 599. 8 In Courtney v. Medtel Pty Ltd [2003] 130 FCR 182 the Full Court of the Federal Court stated that the fact that it is known at the time of the trial that goods had not failed does not compel a conclusion that they were of merchantable quality.

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packaging, the use of any mark in relation to them, what reasonably might be expected to be done or in relation to them, any instructions for use or warnings and the time when they were supplied. Whether the safety of goods is not such as persons generally are entitled to expect is decided by reference to the public at large rather than any particular individual. This is notwithstanding that consumers generally may have either a low or high expectation of safety due to a lack of information to accurately assess risk. The test of whether a product was defective again has been interpreted expansively by the Courts. A product can be defective even if it operates as intended, if the warnings are insufficient to alert consumers of the possible dangers of using the product. It may be sufficient for a third party to rely on an inadequate warning, even if the plaintiff has not seen it. The statutory defenses are also different although there is some overlap. The defenses to an action brought under Part VA of the TPA are equivalent to those under the EC Directive, subject to minor changes in wording. That is, it is a defense for a manufacturer to show that the goods were not defective at the time of their supply, they were defective only because of compliance with a mandatory standard, that the defect was undiscoverable at the time of supply given the state of scientific and technical knowledge at the time, or, in the case of a component part manufacturer that the goods were defective not because of the component but because of the design, markings or instructions, or warnings of the finished goods. The compensation payable to a plaintiff may also be reduced to reflect any acts or omission by the individual as the court thinks fit. Under Part V it is a defense for a manufacturer to establish in relation to an allegation that goods are not of merchantable quality [merchantable quality being defined in section 74D(3)] or are not fit for purpose, that the goods were deficient because of an act or default of a person, not being the defendant or its servant or agent, or due to a cause independent of human control occurring after the goods have left the control of the corporation. For goods alleged to be not reasonably fit for purpose, it is an additional defense to establish that that the consumer did not rely or that it was unreasonable for the consumer to rely on the skill and judgment of the corporation. There is overlap between the defenses and probably no practical difference between the defenses that goods are defective by reason of an act or fault of any person (not being the corporation or a servant or agent of the corporation after it had left the control of the corporation) under Part V and that the defect in the goods that is alleged to have caused the loss did not exist at the time of supply under Part VA. The first requires proof that the defect occurred after supply; the second requires proof that it did not exist at the time of supply. The plaintiff also need not prove that the defect existed at the time of supply by the manufacturer. 2.2.3

Tort

The common law supplements the provisions contained in the TPA and the Fair Trading statutes of the states and territories.

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Australian negligence law remains based upon the House of Lords’ decisions in Donoghue v. Stevenson [1932] AC 562 and Grant v. Australian Knitting Mills [1936] AC 85. Generally, three elements are required: the existence of a duty of care; breach of that duty; and loss or injury resulting from the breach. However, the standard of care owed by a retailer or supplier of goods is different to that of a manufacturer and is more limited. A non-manufacturing distributor of goods that is ignorant of a dangerous defect does not owe the same duty of care as that of a manufacturer. The duty requires reasonable care in the avoidance of personal injury by reference to what the distributor knows or has reason to know. As a part of the civil liability reforms, several state Acts9 now codify the principles that a court should take into consideration in determining the existence and scope of the defendant’s duty of care to the plaintiff and causation. Generally, the Acts provide that a person will not be negligent in failing to take precautions against harm unless the risk was foreseeable, the risk was not insignificant, and a reasonable person would have taken those precautions. In determining what precautions should have been taken, the relevant factors to be taken into account include the probability of harm if care were not taken, the likely seriousness of the harm, the burden of taking precautions to avoid that and similar risks of harm, and the social utility of the activity creating the risk. Importantly, taking subsequent remedial action that would have avoided a risk of harm (e.g., recalling a product, amending warnings, or changing the design or formulation of product) does not impact upon liability and is not an admission of liability. Again, regrettably, the exact wording of the provisions differs between jurisdictions. Somewhat surprisingly, the tort of breach of statutory duty also seems to be undergoing a renaissance in Australian product liability law. Breach of statutory duty can be relevant in product liability litigation in Australia in several ways, adding another layer of complexity to this area of law. First, such a breach may provide evidence of negligence and hence generate civil liability, although it is generally not conclusive. Secondly, a breach of statutory duty may generate civil liability regardless of whether that breach constitutes negligence. Historically, private rights of action are not available where the duties are designed to regulate motor traffic, but are available where duties are to protect the health of industrial workers. In the product liability context, however, allegations of a breach of statutory duty are being increasingly pleaded. 2.2.4

Damages

The basis upon which a plaintiff is entitled to claim compensation varies according to the cause of action. First, Part V Division 2 of the TPA implies statutory warranties 9

Wrongs Act 1958 Vic; Civil Liability Act 2002 NSW; Civil Liability Act 1936 SA; Civil Liability Act 2003 Qld; Civil Liability Act 2002 WA; Civil Liability Act 2002 Tas; Personal Injuries (Liabilities and Damages Act) 2003 NT; Civil Law (Wrongs) Act 2002 ACT.

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into contracts and accordingly the relevant cause of action is a claim for breach of contract governed by state law. Second, claims for compensation may be made under provisions contained in Part V Division 2A and Part VA of the TPA. Third, if a claim is made for property damage or economic loss alleging misleading or deceptive conduct pursuant to section 52 or 53 of the TPA, compensation can be ordered under section 82 of the Act. The High Court has summarized the difference between the measure of damages in contract and tort in these terms: In contract, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the contract been performed—he is entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred, in reliance on the contract (reliance loss). In tort, on the other hand, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the tort not been committed (similar to reliance loss).10

It seems incongruous that the measure of damages for breach of Part V Division 2 (damages for breach of contract) and 2A (statutory damages or compensation) might be different, although that seems to be the case. Statutory damages or compensation under the TPA are recoverable for a wide variety of losses caused by a defective product. Damages are assessed, in general terms, in the same way as damages arising out of a tort; that is, they are restitutionary in nature. Compensation is available for losses suffered as a result of personal injuries subject to the provisions of the civil liability reforms. A person other than an injured party may also claim compensation under Part VA if suffering loss as a result of the other person’s injury or death but probably not under Part V.11 Under the common law, a person claiming that he or she has suffered bodily injury may be entitled to general damages, including pain and suffering, loss of amenities, and loss of the expectations of life. The plaintiff may also be entitled to special damages, including loss of wages (both past and future), medical and hospital expenses, and the like. Damages are also recoverable for mental distress, provided it can be established that the plaintiff is suffering from a diagnosed psychiatric condition. As a general rule, damages for the costs of medical monitoring in the absence of any established injury or loss are not recoverable. The recent civil liability reform process in Australia has introduced further inconsistencies into the law in relation to damages. For example, although the right to 10

Gates v. City Mutual Life Assurance Society Limited [1985–86] 160 CLR 1 at 11–12. Section 75AE of the TPA overcomes difficulties that might otherwise exist under the Act in relation to compensation to relatives claims. For example, section 82 of the TPA may not allow claims by relatives, the reference to “a person” possibly not extending to or including the estate of a deceased person or the representative of that estate (see Pritchard v. Racecage Pty Ltd [1996] FCR 96 per O’Loughlin J at 114 (reversed on other grounds) and Full Court at 72 FCR 203, 142 ALR 527, 25 MVR 17, [1997] ATPR 43,657 (41– 554), [1997] Aust Torts Reports 64,024 (81–421)).

11

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aggravated and exemplary damages in common law personal injury claims has been extinguished in some states they may be available in others. Although there were decisions making clear that aggravated and punitive damages are not awarded in claims brought under the TPA, as these are not compensatory in nature, an express provision to this effect in respect of personal injuries is now included in the TPA. However, such damages may be awarded in tort in claims involving property damage and economic loss, and possibly under section 22 of the Federal Court of Australia Act, 1976 (Cth). Further, considerable limitations and caps have been placed on the amounts of damages a plaintiff can now recover as a result of civil liability reform. However, these limitations are variously expressed by reference to percentage disability, a scale or a monetary amount, and are not uniform. The purpose of the reforms is to abolish the common law relating to awards of damages for pain and suffering, disfigurement, loss of the amenities of life, and loss of expectation of life. Some jurisdictions have introduced a threshold test before there is an entitlement to general damages. In New South Wales, damages are not payable for disability below 15 percent of a most extreme case and for general damages equalling or above 15 percent and up to 33 percent a fixed percentage of the maximum to be awarded is payable. Victoria similarly has a percentage threshold test of 5 percent in the case of injury other than psychiatric injuries and 10 percent for psychiatric injuries. Under Part VIB of the TPA, if the noneconomic loss of the plaintiff is less than 15 percent of the most extreme case, the court must not award personal injury damages for noneconomic loss. Other jurisdictions have adopted a different approach. In South Australia, general damages are calculated by reference to a scale of value reflecting gradations of noneconomic loss. Similarly, in Queensland, there is no threshold and injuries are assessed on a “100-point scale” and by reference to similar injuries in prior proceedings. In Western Australia, the threshold for general damages is $12,000. This amount also operates as a deductible for general damages over $12,000. In the Northern Territory, the threshold for general damages for noneconomic loss is 5 percent of the maximum amount of damages for nonpecuniary loss. Discount rates are applied to future economic loss at a rate of 5 percent in NSW, Northern Territory, Queensland, South Australia, Tasmania, and Victoria and 6 percent in WA. All jurisdictions have introduced a cap on lost earnings for personal injury. This is at three times the average weekly wage in all jurisdictions except South Australia (which has a total amount cap). However, the average weekly wage varies in each jurisdiction. 2.2.5

Class Actions

When Part VA was added to the TPA in 1992, reforms were also introduced allowing plaintiffs to commence representative proceedings (or class actions) in the Federal Court where it attracts Commonwealth jurisdiction such as a claim under the TPA. The Australian Competition and Consumer Commission may also commence

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representative proceedings under TPA section 87(1B),12 and (for Part VA claims) 75AQ,13 but these have been rare.14 Representative or class actions can only be commenced in one state court, the Supreme Court of Victoria. This is notwithstanding that the Federal Court has recognized that state courts are well suited to determine personal injury claims. This is because the judges of state courts are familiar with handling personal injury claims and—unlike in the Federal Court—procedural rules are tailored to deal with these claims.15 In addition, if the proceedings concern a pharmaceutical product or medical device, the Federal Court has thought it a relevant consideration that the plaintiff intends to join a medical practitioner to the proceedings. There also seems to be an attitude on the part of the Federal Court that claims under Part VA are subsidiary to claims founded on negligence. In both the Federal and the Victoria Supreme Courts, a class action requires seven or more persons who have a claim against the same person/corporation. The claims must arise out of the same, similar, or related circumstances, and they must give rise to a substantial common issue of law or fact. Once begun, a class action is likely to continue unless the respondent moves to terminate the action, in which case the onus will be on that party to satisfy the court that the action should be terminated.

12

Section 87(1B) of the TPA allows the Commission to bring an application seeking compensation on behalf of persons who “have suffered, or are likely to suffer, loss or damage by conduct of another person” in contravention inter alia of Part V of the TPA. For an example of such proceedings see Australian Competition and Consumer Commission v. The Bio Enviro. Plan Pty. Ltd. [2004] ATPR 41-998, [2004] FCA 415, [2004] ALMD 6514. The ACCC may only make such an application with the prior written consent of the persons on whose behalf the application is made. This means in effect that the ACCC is not entitled to pursue a representative action on behalf of a general class of aggrieved persons but only on behalf of those who have been identified and who have consented to the action. 13 The ACCC is given a similar power under section 75AQ(1) of the TPA to bring an action in reliance upon the strict liability regime on behalf of persons who have suffered loss as a result of a defective product. Section 75AQ(2) imposes the same limitation of prior written consent. 14 To date, there is one substantive decision concerning a representative action by the ACCC under Part VA of the TPA in Australian Competition and Consumer Commission v. Glendale Chemical Products Pty. Ltd. (1998) 40 IPR 619; [1998] ATPR 41-632. In Australian Competition and Consumer Commission v. Pacific Dunlop [2001] FCA 740, [2001] ATPR 41-823, [2001] ASAL 55-064 (Digest), a representative action was brought arising out the failure to warn of risks associated with the use of latex rubber gloves. In addition to seeking compensation on behalf of an individual, the ACCC sought orders including a declaration that the respondent had engaged in misleading and deceptive conduct and an injunction requiring it to implement a trade practices compliance program. The ACCC argued successfully that it was entitled to sue in different capacities in the same action, that is, to vindicate a public right and also the private rights of individuals. 15 See, for example, Rule 15.12 of the Uniform Civil Procedure Rules 2005 (NSW) relating to personal injury cases, which requires that certain particulars of injuries, disabilities, special damages, and economic loss are to be provided by the plaintiff as soon as practicable after serving the statement of claim. Rule 21.8 provides that discovery may not be made in relation to any document in relation to a personal injury claim unless the court for special reasons orders otherwise. The Federal Court Rules do not contain similar provisions.

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The large number of interlocutory judgments—over 110—that have considered the meaning of the provisions suggest that the application of Part IVA has required clarification in practice. Multiplaintiff proceedings are also frequently lengthy16 and expensive.17 Since the early 1990s, federal product liability representative actions have been brought in at least 23 claims involving multiple plaintiffs. The civil liability reforms, however, may reduce the number of representative actions in the future. Under section 87S of the TPA a court now must not award personal injury damages for noneconomic loss if the noneconomic loss is less than 15 percent of a most extreme case. Although not denying that some of the lawsuits so far have included group members with claims for death or serious injuries, many are less serious. For example, six past representative proceedings followed food poisoning incidents when the majority of group members would have suffered symptoms of gastroenteritis lasting a few days.

2.2.6

Conclusion

Australian product liability laws involve multiple causes of action at common law and State and Federal statutes with different standards of liability, remedies, and measures of quantum. The result is that plaintiffs have different rights depending upon where the wrong occurs and what cause of action applies. Whatever the merits or otherwise underlying the recent civil liability reforms, they have been inconsistently implemented into the laws of the Commonwealth and the states and territories have added a further level of inconsistency to personal injury law. Such issues are regularly confronted by litigants involved in product liability proceedings in Australia, adding to the time, cost, and complexity of such litigation. This is particularly disappointing, given the time and effort that has been spent considering what the law should be by both the Australian Law Reform Commission, leading up to the introduction of Part VA of the TPA, and representative actions into the Federal Court in 1992 and the Ipp Inquiry in 2002, which preceded the civil liability reforms. 16 Moylan v. The Nutrasweet Company [2000] NSWCA 337. The nine plaintiffs in the actions the subject of the appeals were selected from about 265 actions begun in the Supreme Court of NSW to recover damages for injury said to have been caused by the use of intrauterine devices. The judgment notes that evidence before the trial judge, Bruce J. in the liability proceedings began on 24 January, 1996, and finished on 13 September, 1996. Oral submissions were made between 27 October, 1997, and 23 December, 1997, when Bruce J. reserved his decision. The transcript of oral evidence and submissions exceeded 8000 pages. Bruce J. received several thousand pages of written submissions together with additional voluminous documentary exhibits. Bruce J. said that the documentary evidence comprised approximately 15 “lineal metres of folders of exhibits” and the written submissions comprised approximately three “lineal metres of folders of submissions and supporting documents.” 17 In Wong v. Silkfield [2000] FCA 1421, Spender J. stated “. . .absent approval of the proposed settlement the litigation would clearly be at great expense to group members who have thus far contributed legal fees. The anticipated legal costs of the matters proceeding to trial is more than a million dollars.”

2.3 CANADA

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59

CANADA —By S. Gordon McKee and Kathryn J. Manning (Blake, Cassels & Graydon LLP)

Product liability is available in respect of damage to persons or property resulting from the supply of products found to be defective or faulty, and in respect of “pure economic losses” in more limited circumstances. Liability is primarily fault-based, in the absence of contractual privity or warranty, although consumer protection statutes in some provinces create implied warranties between manufacturers or distributors on the one hand and users of products on the other, where privity of contract does not otherwise exist. Where there are implied warranties or contractual privity, liability is, in effect, strict where a product is found to be defective. Where an injured person sues the party that sold a defective product in contract, and each of the other parties in the contractual chain of distribution are brought into the lawsuit, contractual liability can play a prominent role. Liability may be imposed for breach of statutory obligations such as breach of the implied warranties of fitness for purpose or of merchantable quality under sale of goods legislation and consumer protection legislation. In general, there are no schemes of compensation for particular products in Canada, although there have been schemes of compensation created through the class action settlement process related to specific products where the state was a defendant (e.g., blood products distributed by the Canadian Red Cross during the period January 1, 1986 to July 1, 1990).18 Any party within the distribution chain who failed to exercise a reasonable standard of care in the “putting up” (manufacture, distribution, or sale) of the product, and whose failure in that regard caused or materially contributed to a loss may bear responsibility for the defective product in negligence. However, the standard applicable to a manufacturer would be different from the standard applicable to a distributor or retailer, particularly if the manufactured product is not susceptible to intermediate inspection by the distributor or retailer.19 With respect to contractual liability and express or implied warranty, the direct contracting parties or the parties issuing the warranty can bear responsibility for a product defect subject to the terms of the contract or warranty. 2.3.1

Obligation to Recall Products and Failure to Recall

Certain statutory obligations to recall products exist in Canada for specific products. For example, there is a right in the Minister of Agriculture to order a recall under the Canadian Food Inspection Agency Act. In the prescription medicines and medical devices context, there is no legal obligation to recall; however, if a recall 18

See Parsons v. Canadian Red Cross Society, [1999] O.J. No. 3572 (S.C.J.). See Viridian Inc. v. Dresser Canada Inc. [2002] A.J. No. 937 for an example of a case where a manufacturer escaped liability on the basis that an “intermediary” had an obligation to assess the suitability of the product for use in its equipment.

19

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occurs, there are reporting obligations. A claim for “failure to recall” would be brought by an injured person as a claim in negligence for failure to exercise a reasonable standard of care in the “putting up” of the product. The claim may be asserted as a claim for negligence in the design or manufacture of the product (the recall could be evidence of a defect, although not of negligence in the manufacture or design). It may also be asserted as a claim for failure to warn of dangers inherent in the use of the product. The duty to warn in negligence continues after the product is sold and includes a duty to warn of dangers discovered after the product is sold.20 2.3.2

The Burden of Proving Fault/Defect and Damage

The claimant has the burden of proving, on a balance of probabilities, negligence in the manufacture or design of the product, and in the warnings given with respect to its use. However, with respect to manufacturing defects, if the plaintiff can establish that the product came off the manufacturing line in a manner not intended (i.e., inconsistent with the design specifications), the court will assume negligence (either by an employee or in the production process) and will not require a plaintiff to establish where in the production process the negligence occurred. In the context of a contractual or warranty claim, the claimant has the burden of proving a defect in the product. The claimant also has the burden of proving that the negligence or defect caused or materially contributed to damage. The test for proof of causation is “caused or materially contributed to” the injury or loss.21 Proof of exposure to increased risk of a type of injury that the claimant ultimately experienced will not alone be sufficient as a matter of law to find causation, although the court can draw inferences of causation from all of the evidence including evidence of an increased risk of the very injury the claimant suffered.22 2.3.3

The Duty to Warn

Manufacturers have a duty to warn users of their products of dangers inherent in their use, and their foreseeable misuse. Ordinarily, the warnings that will be considered are those provided directly to the injured party. However, a “learned intermediary” exception to the manufacturer’s duty to warn will be recognized where the product is highly technical in nature and intended only to be used under the supervision of experts or the nature of the product is such that the consumer will not realistically receive a direct warning from the manufacturer before using the product, and where an intermediate inspection 20

See Hollis v. Dow Corning, [1995] 4 S.C.R. 634; Nicholson v. John Deere [1986], 58 O.R. (2d) 53 (H.C.); Willar v. Ford Motor Co. Of Canada Ltd., [1991] N.B.J. No. 843 (Q.B.); Can-Arc Helicopters Ltd. v. Textron Inc., [1991] 86 D.L.R. (4th) 404 (B.C.S.C.). 21 See Athey v. Leonati, [1986] 3 S.C.R. 458 (Q.L.) at para. 18; Mizzi v. Hopkins [2003], 64 O.R. (3d) 365 (C.A.). 22 See Snell v. Farrell, [1990] 72 D.L.R. (4th) 289 (S.C.C.).

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of the product is anticipated or where a consumer is placing primary reliance on the judgment of the learned intermediary and not the manufacturer. The “learned intermediary” exception applies where the intermediary has been fully apprised of the risks by the manufacturer and the manufacturer has taken adequate steps to ensure that the intermediaries’ knowledge of the risks approximates its own.23 The “learned intermediary” exception has been applied by Canadian courts for prescription medicines and implanted medical devices.

2.3.4

Available Defenses

The defenses available may include absence of a duty to the injured person (depending on proximity and foreseeability), although this defense is not typically available where the claimant is the direct user of the product; absence of negligence (no breach of the applicable standard of care) in the context of allegations of design defect or failure to warn; absence of defect; lack of causation; and voluntary assumption of risk (where the plaintiff knows of the defect and continues to use the product). In the context of a failure to warn allegation, defenses include the “learned intermediary” exception that the warning was adequate, and that, subjectively, a warning would not have changed the user’s behavior. Concepts of voluntary assumption of risk, intervening act, and intermediate inspection in the context of a manufacturing or design defect claim will often not absolve a manufacturer of all liability because Canadian provinces typically have a “joint and several liability” regime—a manufacturer may need to plead contributory negligence, or bring third-party proceedings for contribution and indemnity from other tortfeasors, to limit its liability. There is no “state of the art/development risk” defense in Canada, although evidence of the state of the art is admissible to assist in proving that a reasonable standard of care was used in the design or development of the product.24 Evidence that a design deficiency in the product or a danger inherent in its use was not discoverable at the time of supply will be admitted as part of the proof that a reasonable standard of care was exercised in the design and warnings of the product. However, there is a continuing duty to warn of the danger once it is known or ought to be known. In all respects, the burden is on the plaintiff to establish negligence, including breach of a reasonable standard of care, on a balance of probabilities. Canadian courts have held that it is not a defense to show compliance with regulatory or statutory requirements relating to the product25 although, if it can be established that a statute or regulation required the product to be manufactured, designed, or labeled in the specific way in which it is alleged to be faulty, and in no other way, a

23

See Hollis v. Dow Corning, supra. See Rentway Canada Inc. v. Laidlaw Transport Ltd., [1989] O.J. No. 786 (H.C.J.); aff’d [1994] O.J. No. 50 (C.A.). 25 See R v. Saskatchewan Wheat Pool [1983] 1 S.C.R. 205. 24

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defense of statutory compliance may be available.26 (Likewise statutory noncompliance is not a cause of action, although it may be evidence of negligence—failure to exercise a reasonable standard of care.) Defendants may claim in a Third Party Claim that the alleged fault/defect was due to the actions of a third party and seek contribution or indemnity for any damages. Under each province’s rules of civil procedure, certain time limits apply to when a Third Party Claim must be issued. For example, in Ontario, it must be brought within 10 days after the defendant delivers a statement of defense or 10 days after the plaintiff delivers a reply. A Third Party Claim may also be brought at any time with consent of all parties or with leave of the court. A defendant may allege that the plaintiff’s actions caused or contributed to the damage by including a counterclaim as part of its statement of defense.

2.3.5

Procedure

Trial by jury is available in most provinces, although trials in Canada are more frequently judge alone. Trial by jury is not available in Quebec. The court in most provinces has the power to appoint technical specialists who assist the judge, but the power is infrequently, if ever, used. Expert evidence is presented by the parties. Class actions are permitted in all provinces in Canada, with most having specific class action legislation. In provinces other than Quebec, an action can be certified as a class action if the claim asserts a sustainable cause of action (which will be assessed based on the pleadings alone), there are two or more persons in the proposed class, the claims of those persons have substantial issues of fact or law in common, it is preferable to resolve the common issues in a class action having regard to the objectives of the legislation—access to justice, judicial economy, and behavior modification—and the proposed representative plaintiff can adequately represent the interests of the class.27 The threshold for class certification in Canadian provinces is generally considered to be lower than in the United States. In Quebec, the threshold is even lower than in the other Canadian provinces. Quebec actions will be allowed to proceed as a class action if the following conditions are met: the recourses of the members raise identical, similar, or related questions of law or fact; the facts alleged seem to justify the conclusions sought; the composition of the group makes the application of article 59 or 67 of the Quebec Civil Code difficult or impractical; and the member to whom the court intends to ascribe the status of representative is in a position to represent the members adequately. Where a class action is certified, discovery and a trial of the common issues will be held first, and then a procedure ordered for resolution of any individual issues (such as causation and damages). Court approval is required for any settlement of a class action. 26

See Ryan v. Victoria (City), [1999] 1 S.C.R. 201. See the Ontario Class Proceedings Act, S.O. 1992, c.6, sections 5 (test for certification), 11 (stages of class proceedings), and 29 (approval of settlement); Western Shopping Centers Inc. v. Dutton, [2001] 25 S.C.R. 534.

27

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Class actions have been certified in Canada on a national basis. Class actions are commonly brought, and with increasing frequency, in Canada. Representative actions are also permitted in most provinces in very limited circumstances. For example, in Ontario, the court may grant a representation order where the proceeding concerns certain estate or trust issues or the approval of a sale, purchase, settlement, or other transaction and there are persons who may have an interest in or be affected by the proceeding who cannot be readily ascertained, found, or served. In most provinces, claims can generally not be brought by a representative group such as a consumer association on behalf of a number of claimants, although consumer associations have been known to fund a class action brought by an individual representative plaintiff. However, class action claims can be brought by a representative group in Quebec. Time to trial varies from province to province, and courthouse to courthouse within each province. Normally, it would take anywhere from two to five years to get to trial. Preliminary dispositive issues can be determined by judge alone. In most provinces, the court can determine a question of law, based solely on the pleadings, and can also be asked to grant summary judgment where there is no genuine issue of fact for trial. However, summary judgment is not available in Quebec. In addition, some provinces (for example Alberta) have a summary trial procedure available in certain circumstances, where the court can determine summarily all or part of the action even if material facts are in dispute and there is a genuine issue for trial. Some provinces also have simplified procedures for smaller claims.

2.3.6

Dealing with Expert Witnesses

The court does not typically appoint experts to assist in considering technical issues. The parties present expert evidence. Unlike lay witnesses, experts are permitted to give opinion evidence within the sphere of their expertise. The evidence an expert gives must be information that is likely to be outside the experience and knowledge of a judge or jury.28 To be admitted, expert evidence must be relevant, necessary, and given by a properly qualified expert and it must not violate any exclusionary evidence rules.29 Novel scientific evidence is subject to special scrutiny to determine its reliability and whether it is essential.30 Factual witnesses other than the parties themselves and expert witnesses are not typically required to present themselves for pretrial deposition, although there are exceptions in a few provinces. Information about what witnesses know related to the matters in issue can be obtained through the discovery of the parties to the litigation in advance of trial. In most provinces leave can be given to examine fact witnesses in exceptional circumstances where material evidence is otherwise 28

See Sopinka on Evidence at 12.27 citing the Supreme Court of Canada in R. v. Abbey, [1982] 2 S.C.R. 24 at 42. 29 See R. v. Mohan, [1994] 2 S.C.R. 9; Sopinka supra at 12.30. 30 See R. v. J.J., [2000] S.C.R. 600.

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unavailable to the parties before trial. Experts are required to serve reports of their findings, opinions, and conclusions in advance of trial. 2.3.7

Discovery

In most provinces, parties to the litigation are required to disclose all documents relating to any matter in issue in the action that are in their possession, power, or control as part of the pretrial procedures. Relevance is broadly construed and in some jurisdictions, documents must be produced that contain information that may lead to a train of inquiry with respect to the issues. Documents are broadly defined and include such items as electronically stored information. In Quebec, however, parties are only obligated to disclose those documents upon which they intend to rely. 2.3.8

Statutes of Limitations

There are statutes of limitation limiting the time for bringing or issuing proceedings, which vary from province to province. In the product liability context, as a general rule, statutes of limitation range from two to six years from the day on which the cause of action arose, with the possibility of the period being extended if a reasonable person could not have known of the material facts giving rise to the cause of action through the exercise of reasonable diligence until some time after the events in question occurred. If a government body is being sued, the limitation period may be much shorter. The limitation period generally does not run while a person is a minor or is incapable of commencing a proceeding in respect of the claim because of his or her physical, mental, or psychological condition. Within the parameters of the statutes of limitations, the court may have some discretion to determine when a limitation period begins to run. For example, under Ontario’s recent legislation, the court may consider the fact that a notice of possible claim has been served in determining when the limitation period can run. 2.3.9

Damages

Damages for bodily injury and damage to property are recoverable. Damages for mental distress generally have been held not to be recoverable in the absence of a diagnosable physical or mental illness or at least a scar on the mind.31 However, some provincial courts have held that this issue should be reconsidered following a full trial.32 Pure economic loss is often recoverable, particularly where the economic losses were incurred as a result of a failure to warn or misrepresentation, or to remedy a condition that was dangerous to person or property.33 Recovery for damage to the product itself may be available in contract or warranty subject to the terms thereof. 31

See Graham v. MacMillan [2003] B.C.J. No. 334 (C.A.). See Anderson v. Wilson [1999], 44 O.R. (3d) 673 (C.A.). 33 See Winnipeg Condominium Corporation No. 36 v. Bird Construction Co., [1995] 1 S.C.R. 85. 32

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General damages for pain and suffering alone are capped in Canada by common law at today’s equivalent value of $100,000 in 1978 dollars adjusted for inflation according to the Consumer Price Index. As of March, 2006, the cap is approximately $307,200. Family members may be able to recover damages for loss of care, guidance, and companionship and certain pecuniary losses. The extent of recovery and circumstances under which recovery is available vary from province to province. Medical costs are often paid by provincial government health insurers, which, in most provinces, have a statutory right to sue to recover costs from a tortfeasor. Canadian courts have not yet determined whether the costs of medical monitoring are recoverable in circumstances where the product has not yet malfunctioned and caused injury, but they may do so in the near future. The issue has been determined to be one that can proceed to trial in a number of the recent class action cases.34 In general, punitive damages are recoverable only where there has been highhanded, malicious, arbitrary, or highly reprehensible misconduct that departs to a marked degree from ordinary standards of decent behavior. Their purpose is not to compensate the plaintiff but to achieve the goals of retribution, deterrence, and denunciation of the behavior.35 In Vorvis v. Insurance Corp. of British Columbia, [1989] 1 S.C.R. 1085, the Supreme Court of Canada also held that, for punitive damages to be awarded in a claim for breach of contract, there must also have been a separate actionable wrong in addition to the breach. Punitive damages are not recoverable in product liability claims in Quebec. For the other provinces in Canada, awards of punitive damages in product liability cases are extremely rare. The authors are only aware of one product liability case where punitive damages were awarded.36 In another Canadian case, the court refused to strike out a claim for punitive damages,37 but stated that, for such damages to be awarded, the act must be malicious or reckless to such a degree as to indicate complete indifference to the consequences that might flow therefrom, including the welfare and safety of others. Accordingly, awards of punitive damages will only be made in product liability claims in very limited circumstances. There is no maximum limit on damages recoverable from one manufacturer. 2.3.10

Costs/Funding

As a general rule, most provinces have a loser pays costs system whereby the successful party can recover a portion of its own legal costs and disbursements from the losing party. For example, in Ontario, a successful party can recover costs on a partial indemnity scale, which, depending on the level of counsel’s billing rates, 34

See Nantais v. Telectronics [1995], 25 O.R. (3d) 331 (Gen. Div.); Servier v. Wilson (2000), 50 O.R. (3d) 219 (S.C.J.); Andersen v. St. Jude Medical (2003), 67 O.R. (3d) 136 (S.C.J.). 35 See Whiten v. Pilot Insurance, [2002] 1 S.C.R. 595. 36 See Van Oirschot v. Dow Chemical Canada Inc., [1995] A.J. No. 611 (C.A.) where the plaintiff recovered $10,000.00. 37 See Vichek v. Koshel, [1988] B.C.J. No. 2345 (C.A.); S.M. Waddams, Product Liability, 4th ed. (Toronto: Carswell, 2002) at 72.

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often approximates at from 30 to 50 percent of the party’s actual legal costs. With the use of offers to settle, a successful plaintiff may be able to recover substantial indemnity costs, which in Ontario are 1.5 times partial indemnity costs. Substantial indemnity costs may also be available to a successful defendant where fraud is alleged against it and not proven at trial. Specific rules with respect to class proceedings in some jurisdictions prevent a successful party from recovering costs in certain circumstances. The availability of legal aid varies from province to province. In Ontario, for example, legal aid would not typically be available for an individual product liability claim. Public funding is, however, available in a number of provinces, including Ontario, for plaintiffs seeking to commence class actions. Restrictions on the availability of public funding vary from province to province, and depend also on the type of case. For example, in Ontario, where funding is available for class proceedings, the committee reviewing applications for funding may consider the extent to which the issue affects the public interest; the likelihood of certification; and the amount of money in the fund created for that purpose. Contingency fees are permissible in all provinces in Canada. The conditions vary from province to province. Some provinces require contingency fees to be courtapproved.

2.3.11

2008 Canadian Update

In the spring of 2008 Canadian Prime Minister Stephen Harper said his Conservative government’s overhaul of Canada’s outdated product safety laws shows it will not tolerate unsafe drugs and consumer goods. “These measures represent an extraordinarily tough approach to consumer health and safety,” Harper stated. For the minority of companies that do not take consumer safety seriously, “Be warned—you will face severe punishment if you willfully expose Canadians to danger,” he said. In noting the range of stories about consumer product safety in 2007, Harper said, “Product safety in Canada needs to be more rigorous.” He said several key pieces of legislation have not been updated in decades, despite the fact products are flowing into Canada from factories all over the world. “We need to set and enforce stateof-the-art safety standards on domestic and imported goods,” he said. Harper said this move follows on the Food and Consumer Safety Action Plan his government released in December 2007, when product recalls reached crisis proportions. Health Minister Tony Clement said the government is tabling a new Canada Consumer Product Safety Act plus making substantial amendments to the Food and Drugs Act. The minister said the legislation and regulations will do the following: †

†

Allow Health Canada to be more proactive in informing industry about its obligations; Develop stringent manufacturing standards for consumer products;

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Educate industry, importers, and sellers about their respective obligations; Require industry to report any injuries, near misses, or product defects; and Enhance government authority to order corrective measures, including the power of mandatory product recall—something previously restricted to food products.

“All of these things will occur and they’ll help sift out some of the bad guys,” Clement stated. For the first time, he said, the government will take an approach to product safety that is both proactive and reactive at the same time. “We’re saying we want to be actively involved in the prevention so we’re going to put an onus on the manufacturer to make sure his product is safe before he sells it,” Clement stated. “We’re going to increase the fines, increase the inspections, increase the number of inspectors and we’re going to make sure when it comes to the safety of our drugs that there’s a mandatory reporting of adverse reactions so that we get the information a lot more quickly and are able to protect Canadian patients better.” “More staff will be hired to help the department carry out these new responsibilities. They will carry out more surveillance on products already in the marketplace,” he said. “For the most egregious offenders, our government is increasing the maximum fine for unsafe consumer products from $1 million to $5 million per offence,” Clement said. “The revamped drug law will require health care institutions to report adverse drug reactions.” “For drugs, fines will shoot up from $5000 to $5 million and beyond” he said. Emile Therrien, former president of the Canada Safety Council, said the new initiatives will only be effective if the government follows through on its pledge to dedicate the necessary resources and enforce the rules. “You (must) put the people in place to make it go, and to make absolutely sure that the enforcement process will be in place to make sure those companies that do not comply with the legislation are punished, and punished severely, because we’re talking about threats to the public safety and the public health of Canadians,” Therrien stated. The expected bill comes after a number of high profile recalls in the past two years. Toy company Mattel recalled more than 21 million of its toys last summer. There were concerns about children’s health from lead paint and small magnets in some products. Pet owners were also shaken in 2007 by a recall at Menu Foods after concerns that it had sold pet food containing melamine. There were 90 recalls in Canada in 2007, nearly triple the amount in 2006, which saw only 32 recalls. 2.4

CHINA —By Karrie Cheung and Terence Lee (Smith and Partners)

The imposition of strict liability on product manufacturers around the world has generally made it more difficult for them to defend product liability claims. This is particularly true in China, where rapid economic development and entry to the World Trade Organization have led to a greater awareness of and demand for

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consumer protection and perfection in the judicial system. This overview summarizes the relevant product liability laws and the challenges that manufacturers face when defending product liability claims in China. The laws governing product liability in China have undergone a period of intense development over the past two decades and continue to evolve. A number of important pieces of legislation have been enacted in this area, particularly the General Principles of Civil Law, the Product Quality Law, and the Consumer Rights Protection Law, all of which have considerably improved the position of consumers. 2.4.1

Liability and Defense

As is the case with similar product liability legislation in many other jurisdictions, the Product Quality Law imposes strict liability on the manufacturer of a product and liability on the seller in the event of negligence (Articles 41 and 42). A seller that cannot identify the manufacturer or supplier of a defective product is regarded as the manufacturer and is thus subject to strict liability. In identifying the party that is liable for damages, Article 43 states that a consumer may seek compensation from the seller (if negligence can be established) and/or the manufacturer of a product (under the strict liability regime). 2.4.2

Statutory Defenses

Under Article 41 a manufacturer is not liable for damage suffered by a consumer if it can prove any of the following: † † †

The product has not been put into circulation. The defect that caused the damage did not exist at the time the product was sold. The science and technology available at the time the product was put into circulation were incapable of detecting the defect.

Under Article 42 a seller may avoid liability by establishing that it was not negligent and that the defect could not have been prevented even if the seller had taken all reasonable care. 2.4.3

Remedies

As in many other jurisdictions, damages payable by a defendant in a civil action in China are compensatory in nature. In an action in contract or tort, damages are intended to place the claimant in the position in which it would have been had the contract been properly performed or had the tort not been committed. Article 119 of the General Principles of Civil Law sets out the general doctrine of tort liability. If personal injury is suffered because of a product defect, the remedies available include compensation for the following: † †

Medical expenses; Loss of income caused by the injury;

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The cost of future living expenses for the claimant and any dependants; Certain statutory compensation if the claimant is disabled or killed; and Funeral costs if the claimant is killed.

If a product defect causes damage to property, the property must be restored to its original condition or the liable party must pay the estimated market value of the property. The Product Quality Law does not address the question of damages for mental distress or emotional injury in a product liability case. However, manufacturers should be aware that, following the announcement by the Supreme Court in 2001 of the Interpretation on Certain Issues for Ascertaining Liability for Non-Physical Injury in Cases of Infringement of Civil Rights, courts have changed their attitude and are more willing to award compensation of this nature in a product liability case. Generally, punitive damages are not awarded in product liability cases. However, Article 49 of the Consumer Rights Protection Law provides that the manufacturer and/or seller must pay the consumer an amount equal to the price of the product as punishment for what is considered a fraudulent act against the consumer. Furthermore, the Product Quality Law provides that a manufacturer’s failure to comply with national or industry standards can lead to severe administrative penalties of up to five times the revenue generated by the sale of the defective product(s).

2.4.4

Burden of Proof

Article 64 of the Consumer Rights Protection Law provides that a party to a civil action is responsible for providing evidence to prove the facts that it alleges. The claimant’s burden of proof in a product liability action against a manufacturer is very similar to the typical strict liability standard that applies in jurisdictions such as the United States. The claimant need prove only that the product contains a defect and that such a defect has caused personal injury or damage to property. The claimant is not required to prove negligence, whereas the manufacturer must prove that it is exempt from liability. Under Article 46 of the Product Quality Law, a “defect” in the context of a product liability claim is defined as (1) posing an unreasonable danger to personal safety or property or (2) constituting failure to comply with the applicable national or industry health and safety standards. Despite these rules, there is considerable controversy about which party should bear the burden of establishing the existence of a defect and a causal link to damages. In practice, the courts tend to favor the consumer, particularly in an action against a foreign manufacturer, and are inclined to shift the burden. Most judges deem that a claimant has satisfied the burden of proof if it can be shown that a product’s performance differed from what was reasonably expected and that such abnormal performance had a damaging consequence.

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Evidence

The legislation governing evidence in product liability proceedings and other civil litigation includes the Civil Procedure Law, the Several Opinions on the Application of the Procedural Law, which was issued on July 14, 1993, and the Several Rules of Evidence Concerning Civil Litigation. The last of these, issued by the Supreme Court on April 1, 2002, is regarded as having been particularly significant in modernizing the rules of evidence in Chinese civil litigation. It provides for a pretrial exchange of evidence and requires the claimant to submit evidential materials to the court within the period set by the court or else lose the right to produce evidence. In China, litigation takes the form of an inquisitorial system under which the judge plays an active role in litigation and controls the proceedings. For example, Article 64 of the Consumer Rights Protection Law provides that judges are responsible for investigating and collecting evidence at the request of either party to the proceedings (if the party shows that it cannot do so itself for some valid reason). Any party to proceedings may apply to the court for the preservation of evidence. Furthemore, if a party proves that an opposing party has evidence which (without reasonable grounds) it refuses to submit because it is allegedly disadvantageous, the evidence in question will be admitted as valid and relevant. Article 11 of the Several Rules of Evidence Concerning Civil Litigation provides that in order for evidence originally arising outside China (e.g., a witness statement or expert report) to be admitted as evidence in a trial in China, it must be notarized, authenticated, and translated into Chinese. All evidence in a foreign language must be translated into Chinese by a professional, court-approved translation company. Apart from these tedious procedural requirements, a party should consider whether and how such foreign evidence or experts will be received by the courts, many of which have never dealt with foreign experts.

2.4.6

Statute of Limitations

Article 45 of the Product Quality Law provides that a product liability claim must be brought no later than (1) two years from the date on which the claimant became aware, or should have become aware, of the injury or damage caused by the defect, or (2) 10 years from the date on which the defective product was first distributed to the consumer, unless the safe use period specified for the product is longer than 10 years.

2.4.7

Comment

China has enacted various laws and regulations to provide greater protection for consumers and a more structured legal framework. However, many questions remain regarding the interpretation, implementation, and application of these laws and regulations due to unclear terms of reference or inconsistent and incompatible provisions.

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One thing is certain: the challenges faced by manufacturers will only increase in China’s challenging and fast-developing commercial environment.

2.5

EUROPE: PART 1 —By Dr. Christopher Hodges (Associate Research Fellow, Center for Socio-Legal Studies, University of Oxford)

Europe is clearly experiencing major developments in national civil justice systems. Reforms or market changes are taking place at both European and national levels right across the continent.38 The pace of change is increasing. Some have characterized the overall nature of change as the inexorable spread of American adversarial legalism.39 Given that civil justice systems are complex mechanisms comprising of multiple inter-related parts, changes in one part can produce unexpected and unintended consequences elsewhere. These systemic effects are not widely appreciated. Too often, those proposing what may appear to be modest change in one aspect have limited awareness of the real effects that will be produced in this complex system. Proposals are rarely based on sound empirical research. Maintaining a balanced system of civil justice will become an increasing challenge. The following aspects are important drivers. First, every government wishes to claim that it is improving access to justice. Some governments and courts are also concerned with modernizing their civil procedure. But extra government resources will not be made available, so private litigation is facilitated. Second, the goal of the European Commission is harmonization of not only substantive rules within the internal market but also EU legal systems. Third, the Commission and governments are concerned with improving the EU economy and competitiveness. The methodology adopted is to place increased pressure on business to be competitive. Thus, there is strong emphasis on regulation and enforcement but also on the deployment of additional pressure from private actors and consumers, adopting private litigation as a regulatory enforcement tool. Fourth, the creation of a harmonized market requires the creation of many harmonized rules.40 The EU constitutional arrangements disperse power amongst the institutions of the EU and Member States. Such situations are controlled through giving increased oversight power to courts, and giving the ability to companies and citizens to make challenges through the courts.41 38

C. Hodges, “Europeanization of Civil Justice: Trends and Issues.” Civil Justice Quarterly (2007) Vol 26, January, 96–123. 39 R. Kagan, Adversarial Legalism: The American Way of Law (Harvard, 2001). 40 S.K. Vogel, Freer Markets, More Rules: Regulatory Reform in Advanced Industrial Countries (Cornell, 1996); W.K. Viscusi, Regulation through Litigation (AEI-Brookings Joint Center for Regulatory Studies, 2002). 41 D. Kelemen, “The Americanization of European Law? Adversarial legalism a` la europe´ene’ paper at the Annual Convention of the American Political Science Association, Philadelphia, PA, September 2006 (proceedings in press).

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Thus, European legalism is born, bringing an inexorable increase in litigation. As Europe modernizes legal systems and encourages privately financed claims and regulatory challenges, will governments either identify to maintain a balanced overview of litigation culture, or succeed in controlling the more powerful elements, such as class actions and the financial incentives of intermediaries? If one looks at the set of factors that made the U.S. litigation scene overheat some decades ago (class actions, unregulated contingency fees, punitive damages, and juries), one can see significant developments in every category except juries in many Member States. No single Member State yet has achieved a full set of the other three factors, but some are very close. What is worrying is the patchwork and arbitrariness of these changes. The encouragement of access to justice and increased competitiveness are worthy goals. However, there are concerns about whether a balanced overview is being taken of the changes in many inter-related elements. Does Europe need to balance some developments by instituting careful controls and monitoring systems?

2.5.1

Class and Representative Actions

The spread of class action mechanisms is the most striking development. This has several inter-related aspects. Many European jurisdictions, for some years, have permitted collective or representative actions by consumer organizations or interest groups.42 Some states permit consumer organizations to keep a percentage of the damages won, to finance future claims (Italy, Greece). However, others empower only primarily public authorities or ombudsmen to bring regulatory claims on behalf of consumers, but enlist consumer or private organizations in the information-gathering process (examples in Norway, Finland, Denmark, Sweden, Netherlands, Ireland, and the United Kingdom). The involvement of consumer organizations in the enforcement of consumer protection laws has been adopted in a series of European measures, including the following: † † †

†

†

42

Directive 84/450/EEC on misleading advertising, Article 4.1; Directive 93/13/EEC on unfair terms in consumer contracts, Article 7; Directive 98/27/EC on cross-border injunctions for breach of specified consumer protection Directives, Articles 1– 3; Regulation 2006/2004 on consumer protection cooperation, Articles 4.2 and 8.3; Directive 2005/29/EC on unfair business-to-consumer commercial practices, Article 4.

See W. van Boom and M. Loos, Collective Enforcement of Consumer Law: Securing Compliance in Europe through Private Group Action and Public Authority Intervention (Europa Law Publishing, 2007) including C. Hodges “Collectivism: Evaluating the effectiveness of public and private models for regulating consumer protection.”

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Under the above mechanisms, consumer organizations can apply for injunctions to protect general consumer interests but, historically, not damages. These mechanisms have not been widely used.43 A 2007 study on alternative dispute resolution mechanisms concluded that the current position is one of great diversity, and in an experimental stage.44 An important factor is that consumer organizations have not had funding, and have been worried about “loser pays,” so these issues come under attack when governments think about making the mechanisms more effective (see below). Changes in funding systems and business generation by lawyers may suddenly activate all these class or collective mechanisms. An instantaneous blanket removal on still quite extensive national prohibitions on advertising by lawyers is to be removed under the recent Services Directive.45 Advertising of any services is generally beneficial and encourages competition; but some cases of stirring up class actions have been criticized in the United States, Australia, and the United Kingdom. However many European States are thinking about going further, notably giving the right to seek damages for consumers. The Swedish Class Action Law 2003 is a prime example. The United Kingdom has been considering introduction of a general Representative Action mechanism for some years,46 and is consulting on damages claims in competition law.47 Consideration of draft Bills in France and Italy has caused considerable debate. The countries that have recently introduced wider types of collective action mechanisms, sometimes motivated by courts’ need for a mechanism to manage multiple similar individual cases, are England and Wales (2000), Spain (2001), Sweden (2003), the Netherlands (2005, for settlements), Germany (2005, for investors), Israel (2006), Finland (2006), Norway (2006), and Denmark (2006). France, Italy, Ireland,48 and Belgium have been considering introducing general mechanisms. The Swiss Federal government seems to be alone in strongly condemning the class action mechanism. In addition, there has been extensive debate at the European level over whether to introduce two general collective mechanisms, one for consumer protection claims and one for antitrust claims.49 The possibility of a consumer collective mechanism was 43

The Commission’s Green Paper: Access of Consumers to Justice and the Settlement of Consumer Disputes in the Single Market COM(93) 576, 16.11.1993, p 64, noted that of the then 12 Member States, eight states gave consumer organizations a right to bring claims for the protection of the collective interest of consumers, with one (Belgium) permitting such actions to be undertaken by both consumer organizations and by an administrative authority, and the three other states protected collective interests through an independent administrative authority (the Office of Fair Trading in the United Kingdom, the Consumer Ombudsman in Denmark, and the Director of Consumer Affairs in Ireland). For the international picture see: Background Report: OECD Workshop on Consumer Dispute Resolution and Redress in the Global Marketplace, 19–20 April 2005, Washington, DC (OECD, Paris, 2005), p 31. 44 J. Stuyck et al., Study on alternative means of consumer redress other than redress through ordinary judicial proceedings (Catholic University of Leuven, 17 January, 2007), published April 2007. 45 Directive 2006/123/EC, to be brought into force by December 28, 2009. 46 Department for Constitutional Affairs Consultation Papers, 2001 and 2005. 47 Discussion paper: Private actions in competition law: effective redress for consumers and business, Office of Fair Trading, April 2007, 5C/053. 48 Report: Multi-Party Litigation, The Law Reform Commission, 2005, LRC 76-2005. 49 Green Paper: Damages actions for breach of the EC antitrust rules, COM(2005) 672, December 19, 2005.

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first raised in 1984, when the Commission decided that it was not possible to propose binding harmonization of national mechanisms on collective actions, as there was too much complexity and diversity amongst the national systems.50 Current EU Consumer Strategy is to consider action on collective redress mechanisms for consumers.51 The European Commission held a period of reflection from July to November 2007, and commissioned a further study. The Commission revealed revolutionary proposals in 2005 to encourage more damages claims for breach of competition laws, notably including a collective mechanism and a range of discovery and funding provisions.52 This approach is based on encouraging damages claims as an aid to enforcement.

2.5.2

Substantive Law

Legislation that would encourage shareholder class claims against companies and directors is being enacted in Brussels and some Member States (United Kingdom). Preparations are well advanced on the production of a European Civil Code on contract and tort law.

2.5.3

Funding Litigation

The increasing liberalization of funding mechanisms is of considerable significance. Despite the desire of the European Commission to encourage Member States to spend more on legal aid,53 governments and voters do not prioritize such expenditure.54 As a result, private funding systems are increasingly encouraged. The concerns here are that the spread of uncontrolled and disproportionate contingency fees may lead to unjustified consumer detriment, through losing a disproportionate amount of any sums recovered, and also an increase in uncontrolled and unjustified litigation.55 There is widespread distrust in Europe of encouraging what are seen as the grossly excessive legal fees that are generated in U.S. class action cases, where consumers may gain little value.56 50

Memorandum from the Commission: Consumer Redress COM(84) 692, December 12, 1984. EU Consumer Policy Strategy 2007-2013 COM(2007) 99, March 13, 2007. 52 Green Paper: Damages actions for breach of the EC antitrust rules, COM(2005) 672, December 19, 2005; Commission Staff Working Paper: Annex to the Green Paper “Damages actions for breach of the EC antitrust rules,” SEC(2005) 1732, December 19, 2005. 53 Directive 2002/8/EC of January 27, 2003 to improve access to justice in cross-border disputes by establishing minimum common rules relating to legal aid for such disputes. 54 European Judicial Systems 2002: Facts and figures on the basis of a survey conducted in 40 Council of Europe Member States, http://www.justiceinitiative.org/db/resource2?res_id¼102527. This quoted expenditure per inhabitant as E53.80 for England and Wales, E43.11 for Scotland, E13.96 for Ireland, E5.59 for Germany, E4.64 for France and E0.78 for Italy, amongst others. 55 This point was made by the Irish Law Reform Commission: “A careful balance between the avoidance of undue impediments to legitimate litigation and the filtration from the system of frivolous actions is required.” Report: Multi-Party Litigation, The Law Reform Commission, 2005, LRC 76-2005, p 21. 56 D.R. Hensler, “Revisiting the Monster: New Myths and Realities of Class Action and Other Large Scale Litigation,” 11 Duke J. Comp & Int’l L. 179 (2001). 51

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“No foal, no fee” arrangements, and success fees, have been known in some states for some time, but hitherto have not been widely used (Estonia, Finland, France, Ireland, Lithuania, Scotland, Portugal, and Switzerland in 2005). Full-blown contingency fees are emerging in Italy, the first State to take this step (2006). The German Constitutional Court held in December 2006 that contingency fees are not unconstitutional and that legislation should permit them. Britain introduced a regulated halfway house system in 1999 (conditional fee agreements) under which success fees are limited and regulated.57 There have been calls for contingency fees to be introduced in England.58 After the supreme court of Australia held that contingency fees are lawful and not contrary to public policy, the commercial funding intermediaries that have been encouraged there are likely also to seek to finance litigation in England, in addition to law firms. Meanwhile, claims funding companies in England produced considerable consumer detriment, requiring the urgent introduction of statutory regulation.59 Calls for punitive damages have been made under the Rome II Directive (on the proper law of noncontractual obligations),60 as part of a package to encourage regulatory enforcement of competition damages claims across Europe,61 and in order to facilitate general group claims in England.62 In 2006 Spain introduced punitive damages under male and female equality legislation. 2.5.4

Modernization and Harmonization of Civil Procedure

At a general systemic level, EU civil justice systems are clearly going to change significantly. General reforms of civil procedure systems and rules have been undertaken in England and Wales, the Netherlands, and Spain (2001), and are under way in Denmark, Poland, Switzerland, and Sweden. The introduction of wider access to documentary evidence (discovery) is also evident in Spain: such a move from civil law jurisdictions would obviously ease moves to harmonize civil procedure law. Significant liberalization of rules on proof of causation has been carried out by supreme courts in the Netherlands and United Kingdom, where concepts of increase of risk as criteria for proportional liability have been adopted. The U.K. courts’ adoption of several but not joint liability, which would have limited claims by limiting 57

Access to Justice Act 1999, s. 27. The English Civil Justice Council Recommended in June 2007 that contingency fees should be permitted, and the “loser pays” rule removed, for group actions. It recommends that a Supplementary Legal Aid Scheme should be introduced for claims generally, financed by percentage contributions from claimants funded by normal legal aid, which would be used to finance future claims. 59 Compensation Act 2006. 60 Amended proposal COM(2006) 83, February 21, 2006. 61 Green Paper: Damages Actions for Breach of the EC Antitrust Rules, COM(2005) 672, December 19, 2005. 62 The English Civil Justice Council has recommended in June 2007 that contingency fees should be permitted, and the “loser pays” rule removed, for group actions. It recommends that a Supplementary Legal Aid Scheme should be introduced for claims generally, financed by percentage contributions from claimants funded by normal legal aid, which would be used to finance future claims. Court decisions are moving towards permitting “third party funders” of litigation, as in Australia (recent Fostif decision). 58

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individual defendants’ exposure to their personal contribution to injury,63 was swiftly reversed by legislation.64 The Directorate General for Freedom Security and Justice of the European Commission will be seeking to align national systems in the medium term.65 A Green Paper on minimum standards for some aspects of procedural law is due in 2008. Meanwhile it is undertaking significant harmonization of small claims66 and crossborder mechanisms, and Alternative Dispute Resolution (ADR) mechanisms.67 Interesting alternative approaches including compensation schemes are growing in several States: medical and drug injuries are dealt with under compensation schemes in the Nordic states,68 the Irish Personal Injuries Assessment Board is making slow progress, France has a medical and medical product injury compensation scheme,69 and England is set to introduce a medical negligence scheme.70 2.5.5

Conclusion

Very considerable change is under way in European civil justice systems. Powerful inter-related forces are at work, which are not widely understood. There is a risk of increasing access to justice and imposing regulation by litigation without producing net benefits for society or the economy. There is an urgent need to monitor and investigate the situation, and to ensure that balanced systems are maintained.

2.6

EUROPE: PART 2 —By Rod Freeman (Lovells LLP, London)

European Community legislation takes a number of forms, the most important of which, for present purposes, are directives. A directive is not directly binding on 63

Barker v. Corus U.K. Ltd (and conjoined cases) [2006] UKHL 20. Compensation Act 2006, s. 3. 65 Explanatory Statement, Report on the prospects for approximating civil procedural law in the European Union COM(2002)746 þ COM(2002) 654 – C5-0201/2003 – 2003/2087(INI), Committee on Legal Affairs and the Internal Market, A5-0041/2004, January 30, 2004. 66 Proposal for a Regulation of the European Parliament and of the Council establishing a European Small Claims Procedure, COM(2005) 87, 15.3.2005, see art. 7; the procedure would apply to claims under E2000, although the legal basis under art. 61EC for coverage of domestic disputes as well as crossborder ones is, however, a matter of debate. 67 COM(2004) 718 final, 22.10.2004. This http://europa.eu.int/eur-lex/LexUriServ/site/en/com/2004/ c0m2004_0718en0.1.pdf is proceeding through the European Parliament. A voluntary European Code of Conduct for Mediators was launched in July 2004: http://europa.eu.int/comm.justice_home/ejn/ adr_ec_code_conduct_en.pdf. 68 See C. Hodges, “Nordic Compensation Schemes for Drug Injuries,” J. Cons. Policy (2006). 69 The ONIAM scheme. Titre IV du Livre Ier de la Premie`re Partie du Code de la Sante´ Public, tel qu’il result de la loi nº 2002-303 du 4 mars, 2002, relative aux droits des maladies et a` la qualite´ du syste`me de sante´ et de la loi nº 2002-1577 du 30 de´cembre, 2002, relative a` la responsabilite´ civile me´dicale: http://www.oniam.fr/. 70 NHS Redress Act 2006. 64

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individuals within the EU, but is binding on the Member States, requiring them to give effect to its provisions. As a general rule, directives become binding on individuals when they are implemented by the individual Member States. For example, the Product Liability Directive (Directive 85/374/EEC) was adopted by the European Council in 1985, but it did not become part of the law of the United Kingdom until 1987 with the introduction of that nation’s Consumer Protection Act. It did not become part of domestic law of France until 1998, many years beyond the deadline for implementation specified in the directive itself. 2.6.1

The Product Liability Directive

The Product Liability Directive introduced into the EU a uniform system of strict liability for defective products. Although the Directive does not permit the coexistence of national product liability laws that provide consumers with greater protection than its own provisions, the Product Liability Directive does not prescribe an exclusive system of product liability. Its provisions operate alongside other systems of general liability in effect in each Member State, primarily those based on contract and tort. Indeed, the European Commission’s Third Report on the Product Liability Directive, published in September 2006, (the “Third Report”) concluded that complete harmonization of EU product liability laws was unnecessary and unrealistic. Under the Directive, a producer is liable for a defect in his product even if there is no proof of fault on the producer’s part. However, the claimant must still prove defect, damage, and causation in any claim. The Directive also set out a number of possible defenses available to the producer: † † †

†

That the producer did not put the product into circulation; That the defect did not exist when the product was put into circulation; That the state of scientific and technical knowledge at the time that the product was supplied was not such that the defect might have been discoverable (the “Development Risks Defense”); or In the case of a manufacturer of a component, that the defect is attributable to a design fault of the product to which the component was fitted and not to the component itself.

In 2001, Lovells, commissioned by the European Commission to conduct a comprehensive, pan-European survey on the Product Liability Directive (the “Lovells Survey”), observed that it appeared that the Directive was operating satisfactorily across Europe. Although it found that there were a few areas of disparity, there was little evidence that the differences created “significant barriers to trade or distortion to competition in the EU.” 2.6.2 Areas of Disparity in the Application of the Directive Across Europe The areas of disparity between Member States’ product liability legislation were identified in greater detail in the European Commission’s Third Report on the

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Product Liability Directive. This Third Report, published in September 2006, concluded that complete harmonization of EU product liability laws was unnecessary and unrealistic. 2.6.2.1 Burden of Proof Although the Directive imposes strict liability on the defendant so far as fault is concerned, Article 4 of the Directive states that, “the injured person shall be required to prove the damage, the defect, and the causal relationship between the defect and damage.” It has been argued that this burden of proof on the claimant is unfair because the injured person will often not have the financial, technological, and legal resources to investigate the issues fully. The counter argument, as proffered by producers and their insurers, is that the relaxation or reversal of the burden of proof will open the floodgates to spurious claims. In some European countries, therefore, there has been a tendency for the courts to assist claimants by making inferences as to a producer’s liability from the fact that a product has failed without obvious reason. In Austria, for example, a product has been held to be defective where the claimant can demonstrate that the product failed to perform in a way that can be reasonably expected by a consumer and that this failure was not the cause of some other, extraneous, factor.71 A similar approach is taken in Portugal, where there is a presumption of defect in a consumer product when it fails to meet the description of the product set out in the contract.72 2.6.2.2 Concept of Defect The question of whether it is enough for an injured consumer simply to prove that the product failed and consequently caused injury was one that was highlighted by the Lovell’s Survey. That survey further queried whether other factors might play a role in calculating exactly when a defect has occurred, that is: 1. Whether there is room for a risk/benefit assessment in identifying the level of safety a consumer is entitled to expect; 2. Whether the conduct of the producer in the design, manufacture, and marketing of the product is to be taken into account; and 3. Whether a producer can be held to a higher standard of care for the purposes of product liability than the standards expected of a producer of a particular product under independent product-specific safety legislation. National courts have found it difficult to assess what the consumer might reasonably have expected from products that are new, complex, or carry inherent risks. In sectors such as the pharmaceutical industry, therefore, there have been calls for the factors listed above to be considered, tending towards an approach more akin to that of the United States, where a risks/benefit analysis is more commonly used. 71

Stefan Lenze, “Austrian Supreme Court cuts national rules of proof of product defect,” European Product Liability Review 19 (June 2005), p 32. 72 Matthew Hibbert and Stefan Lenze, “European Commissions Third Report on the Product Liability Directive,” European Product Liability Review 25 (December 2006), p 2.

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2.6.2.3 Development Risks Defense There are two possible interpretations of the Development Risks Defense. The strict approach, reflected in the AdvocateGeneral’s opinion in the European Court of Justice case of Commission v. United Kingdom,73 has been to view it as applying only when the prevailing scientific and technological knowledge was such that the particular risk was unknown to anyone or was not “accessible” at the time that the product was put into circulation. The question of accessibility is determinant on the specific facts of the case. This has formed the general approach taken by the English and German courts. A second, more liberal, interpretation has been to view its application as occurring, for example, where, although the risk was known, the discovery of the risk as pertaining to a specific product was impossible. This broader interpretation was adopted by the Dutch courts in the Sanquin Foundation case,74 in which the District Court held that, although the risk of contracting HIV through blood products was known, the Foundation could not have been expected to do more than it had with regard to blood donation and delivery. The Foundation had met the standards that the prevailing scientific and technological learning had set. If this second interpretation continues to be used by European courts, the Development Risks Defense might be able to eschew its reputation of being merely a token defense and be used more commonly in product liability disputes, although it is significant that this approach was rejected in the more recent U.K. case of A and Others v. National Blood Authority.75

2.6.3

Limitation Periods

The Product Liability Directive provided that a limitation period of three years should apply, running from the day on which the claimant became aware, or should reasonably have become aware, of the damage, the defect, and the identity of the producer. Further, no claim can be brought pursuant to the Directive upon the expiry of a period of ten years from the date on which the producer put the product into circulation. Limitation periods vary from country to country in relation to claims brought in contract or tort. In England and Wales, the general rule is a limitation period of six years from the date of the cause of action for both tort and contract claims, although there are different rules for latent damage. Special rules apply to personal injury claims resulting from negligence, nuisance, or breach of duty. In such cases the claim must be brought within three years from the date of the injury or knowledge of it. Limitation periods for tort and contract claims vary widely across Europe. In the Netherlands, for example, the limitation period for tort claims is twenty years, but the equivalent period in Germany is only three years. 73

[1997] ALL ER (EC) 481. Hartman v. Stichting Sanquin Bloedvoorziening, RB Amsterdam, February 3, 1999, NJ 1999 621. 75 [2001] 3 ALL ER 289. 74

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Other Procedural Issues

Trials in Europe for product liability claims, whether in common law or civil jurisdictions, are generally held before judges and without juries. The time a case takes to come to trial also varies from country to country. In England and Wales, parties must also comply with the preaction protocols set out in the Civil Procedure Rules. There are specific protocols for personal injury and disease and illness claims. Such protocols are aimed at encouraging the exchange of early and full information about the prospective legal claim, enabling parties to avoid litigation by agreeing a settlement of the claim before the commencement of proceedings, and supporting the efficient management of proceedings where litigation cannot be avoided. 2.6.5

Damages and Costs

Under the Directive, a producer is liable for any death, personal injury, and damage to property caused by the defect (although not damage to the defective product itself). The Directive also set a threshold limit so that claims worth less than E500 cannot be brought under the Directive. This limit was translated into £275 Sterling for the United Kingdom, and Member States have set lower limits (for example Italy’s threshold is E387). Damages that can be obtained in claims brought under contract law and in tort vary from country to country. In England, damages are set to put the injured party in the position he would have been in if the negligent act had not occurred or the contract had been properly performed and similar methods are used to calculate damages across Europe. Countries do differ, however, on their approach to awarding damages for notions such as loss of chance and loss of enjoyment. In Italy, damages are awarded for the loss of an ability to lead a peaceful existence. Of all the major EU jurisdictions, only in Ireland is the concept of punitive damages recognized, and even there, these are only awarded in exceptional circumstances (for example, for a deliberate and conscious violation of a consumer’s rights) and tend to be in fractions of the general damage award and not multiples. 2.6.6

Product Safety Regulation

The General Product Safety Directive was first adopted in 1992. It introduced into the EU a “horizontal” regime for product regulation across virtually all consumer product sectors with the aim of ensuring the safety of consumer products placed on the market. Prior to this, a more “vertical,” industry-specific, approach had been taken. With the 1992 directive, however, the obligation to ensure that only safe products were placed on the market was incumbent upon manufacturers, own-branders, and in some cases, importers and distributors across sector lines. The 1992 directive was revised by the new General Product Safety Direct (2001/ 95/EC) (GPSD), which set a date for implementation of January 15, 2004. The new directive imposed a number of new obligations on producers and distributors of

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consumer products and has already had a large impact on the way producers do business in Europe. The GPSD is applicable to all products that are, or that it is reasonably foreseeable will be, made available to consumers (except to the extent that safety risks are covered by more specific EU measures) and sets out a number of obligations on producers that include the following: † †

† † † † †

†

Ensuring that only safe products are placed on the market; Providing customers with enough information to assess the inherent risks in the product; Setting up systems and procedures for risk analysis and risk avoidance; Testing of marketed products; Maintaining a register of complaints and investigating them; Notifying distributors of any monitoring of products that is undertaken; Notifying the competent authorities as soon as it is known that a marketed product poses unacceptable risks; and Recalling products where it is appropriate to do so.

For their part, distributors are expected to cooperate with the producers’ activities and maintain and make available any information relating to the product’s distribution and/or the risks it poses. The GPSD does not extend to products to the extent that they are subject to separate, industry-specific, EU product safety legislation. The notification obligations introduced by the GPSD are broadly similar to those in the United States, in that producers must notify the national authorities if a product in the marketplace poses an unacceptable risk; however, the safety threshold in Europe for reporting risks is, in some cases, lower. Information about product risks can be communicated swiftly among national authorities using the Rapid Alert (RAPEX) system. If the potentially unsafe product has been marketed throughout the EU, there is the possibility that the producer may be expected to give immediate notification to national authorities across the EU—that is, to all 27 Member States. Although nonbinding European guidelines suggest that a producer need only notify the authority in the country in which it is established and leave it to that authority to spread the word, the fact that the producer might face grave consequences if the authority fails to notify other authorities generally generates a preference on the part of a prudent producer to approach each national enforcement authority separately when reporting a product risk.

2.6.7

Risk Management and Product Recalls

The GPSD has made effective risk management crucial to any manufacturer or distributor operating in the EU. The precautionary approach now taken by companies as a result of the GPSD has meant that product recalls are becoming more and more commonplace and more public. As well as product recalls being initiated by the

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producer of the risky product, the GPSD gave national authorities the power to introduce them too. For their part, national authorities have become more interventionist in instances where they consider a recall is not being handled appropriately. Complications can, therefore, arise in pan-European recalls, if not handled expertly, when national authorities in different Member States view a potential risk and its effective remedy divergently.

2.6.8

Conclusions

In 2001, the Lovell’s Survey found that product liability claims in the EU had increased significantly over the previous decade; however, it was felt that this was more because of socioeconomic factors (such as increased awareness of consumer rights and greater access to information) than as a result of the Directive. It was concluded that the Directive had only moderately increased the instances of product liability claims being brought and the success rates of those claims. Although this remains the case, there have been significant developments in the spheres of product safety regulation and collective action that signal trends for producers to be wary when marketing their goods in the EU. In the realm of product safety, the number of RAPEX notifications of dangerous consumer products is increasing yearly. More than half of these notifications relate to collective actions initiated by national authorities, indicating their growing preference for active management of product safety issues. Products originating in China account for around half of safety notifications and, of all the products marketed in Europe, toys make up approximately a quarter of all RAPEX notifications. Businesses are starting to acknowledge the real reputational and financial risks that might be occasioned by a failure to adhere to the standards set out in the GPSD, and some have initiated changes to their internal systems to manage such risks. However, many businesses remain underprepared for possible crises that may occur and the legal obligations incumbent upon them in the EU. As well as the statutory penalties set out in the GPSD and its implementing legislation, failure to meet product safety obligations may also leave a producer open to product liability claims. Such claims will be more frequent if collective action becomes commonplace across Europe. Whereas developments in product liability law, collective redress, and other procedural mechanisms will certainly increase product liability risks for manufacturers in the EU over time, it is unlikely that those risks will ever reach the level of those in the United States, where punitive damages, well-developed class action procedures, and the unpredictability created by jury trials prevail. However, without doubt, the greatest legal threat to product manufacturing in the EU is flowing from the regulatory field, and manufacturers are now recognizing (often through bitter experience) that the EU, over recent years, has become a much more difficult and demanding regulatory environment than the United States in most product sectors. The risks for businesses that ignore those developments are at least as great as those they might face in the U.S. litigation system.

2.7

2.7

JAPAN

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JAPAN —By Yuji Ogiwara and David E. Case (White & Case LLP)

Persons and legal entities (whether a corporation or partnership, and so on; hereinafter “claimants”) may seek compensation for having been injured by a defective product through one of several legal avenues. Traditionally, such claims were brought as tort claims under the Civil Code of Japan (CCJ), but since 1996, claims have been able to be brought under the Product Liability Law.76 Claims may also be brought under breach of contract theories and, depending on the nature of the product involved, there may exist publicly or privately funded insurance schemes. Under the Japanese Product Liability Law (JPLL), a claimant may seek compensation for damages caused by a defective product. The JPLL, like its counterparts around the world, alleviated the evidentiary burdens that were placed on claimants who were forced to bring tort claims for damages against manufacturers and importers of defective products. Under the JPLL, a claimant is relieved of the burden of proving that the manufacturer or importer owed a duty to the claimant and negligently or intentionally injured the claimant. Instead, under the JPLL, the claimant need only prove that the product was defective and that the defect was the cause of the injuries suffered. Simply stated, the JPLL imposes liability on a manufacturer of a product for personal injury or property damage caused by a defect existing in the product, regardless of whether it was domestically produced or imported by the manufacturer (JPLL §1). A product is defined to include any “movable property manufactured or processed.”77 Under Japanese law, movables are generally defined as all corporeal things other than land and fixtures so the scope of the JPLL excludes nonmovables such as real estate, energy, or unprocessed and unpicked agricultural products. The JPLL defines a defect as a lack of safety that ordinarily a product should possess, taking into consideration (1) the characteristics and nature of the product; (2) the ordinarily foreseeable uses of the product; (3) the state of knowledge and technology at the time of manufacture and/or delivery; and (4) any other relevant circumstances relating to the product. Defects can be broadly categorized into three groups. One type of defect arises during the design of the product as a result of the manufacturer failing to sufficiently consider safety issues relating to use, handling, or storage of the product. Another type of defect might be attributed to the manufacturer’s failure, under the circumstances, to properly warn consumers of the hidden or, at least not readily apparent, dangers and risks associated with use of the product, and properly instruct the consumer on how to use, handle, or store the product to avoid such dangers and risks. A third type of defect arises when a product is improperly manufactured. Whether a product is defective is determined on a caseby-case basis and is fact-specific to the claimant’s own handling, use, and storage of the product. 76 77

Law No. 85 of 1994, the “JPLL.” JPLL §2(1).

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Liability of the manufacturer is strict once it is held that they sold a defective product, but the amount of damages ordered to be paid may be reduced if the court finds that the injured claimant’s own negligence or misconduct played a part in the amount of damage suffered. Besides the JPLL, a claimant may bring breach of contract or tort claims under the CCJ. Provided a direct contractual relationship exists between the injured party and the seller of the defective product, breach of contract claims or implied statutory warranties may be brought under CCJ Article 415 (Liability for Incomplete Performance of Obligation) and CCJ Article 570 (Warranty against Latent Defect). In most modern consumer transactions, the consumer does not typically have a contractual relationship with the manufacturer; in today’s world of e-commerce, having a direct contractual relationship with the importer and seller of a product has become more common. If no contractual relationship exists and if a claim brought under the JPLL is unsuccessful, an injured party may bring a tort claim under CCJ Article 709. CCJ Article 709 allows claimants to claim that a third party has committed an “illegal” or “unwanted” act. This Article is akin to a traditional tort action in Common Law jurisdictions. CCJ Article 709 provides that “[a] person who violates intentionally or negligently the right of another is bound to make compensation for damage arising there from.” But while this general right of remedy is available to any person injured by a person or thing, the burdens of proof placed on claimants are high in the case of a product liability suit, making the chance for success in a product liability context low. As such, Article 709 is viewed as a last resort for persons injured by a defective product. Finally, the Consumer Contract Law (Law No. 61 of 2000 as amended; CCL) protects consumers in their dealings with merchants. However, although this law limits the extent to which a seller of a product may disclaim warranties relating to a product or restrict the remedies available to a purchaser injured by a product sold by the seller, this law does not offer a cause of action for damages caused by defective products.

2.7.1

State Compensation Program

The Japanese government operates compensation schemes for pharmaceuticals and for products that are deemed to have specific risks. One such scheme is the Preventive Inoculation Law,78 which compensates the victims of injuries caused by inoculations. This scheme is entirely funded by the Japanese government without contribution by the private sector. Another scheme is the Pharmaceuticals and Medical Devices Agency Law,79 which established the Pharmaceuticals and Medical Devices Agency (MD Agency). Under this scheme, compensatory payments covering medical and funeral expenses are made to individuals or their families in the event of illness, disability, or death 78 79

Law No. 68 of 1948 as amended. Law No. 192 of 2002 as amended.

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caused by side effects of pharmaceuticals. To administer the scheme, the MD Agency charges pharmaceutical companies a contribution amount (kyoshutsu-kin). There are two types of contributions. One is a general contribution that is charged annually to all companies that manufacture, import, or market drugs, based on sales revenue. A second contribution is made by specific companies involved in the manufacture, import, or marketing of drugs that are discovered to be dangerous or cause injury. Another scheme is found under the Consumer Products Safety Law80 (CPSL). The CPSL established the Consumer Product Safety Association (Seihin Anzen Kyoukai; CPSA), which administers a safety-goods mark or SG-Mark program for certain, classes of products, together with a related consumer compensation program for persons injured by products carrying the SG-Mark. To carry the SG-Mark, a company must have its products conform to the safety specifications and requirements promulgated by the CPSA. The compensation program is funded by the CPSA through, among other means, the sale of SG-Mark stickers, which are attached by the company to all products that meet the SG-Mark standard. Adherence with the SG-Mark standards is voluntary, but for many products, commercial pressures compel adherence. Adherence to an SG-Mark standard does not absolve a company of liability; it only provides a means by which a consumer may seek compensation in the event of an injury. The CPSA will compensate a person up to 100 million yen, depending on the severity of the injury, for claims brought within a defined number of years after purchase of the product by the consumer. The CPSA bases payment on various factors. For example, the CPSA will not pay any compensation in the event that the injured party was contributorily negligent. 2.7.2

Parties Held Responsible

Under the JPLL, the classes of persons and entities that may be liable for injuries caused by a defective product include (1) any person who manufactures, processes, or imports the product as a business; (2) any person holding himself out to be a manufacturer of a product by putting his name, trade name, trademark, or other feature on the product, or any person who puts his name, etc. on the product in a manner mistakable for the manufacturer’s name; or (3) apart from any person mentioned in the preceding subsections, any person who affixes his name to a product and who may be recognized as a manufacturer-in-fact, taking into consideration the manner in which the product was manufactured, processed, imported, or sold, or any other relevant circumstances (hereinafter, the “manufacturer”). In addition, liability may pass through the final manufacturer and include subcontractors, raw material providers, and parts supplies. In such cases, subcontractors, raw material providers, and part manufacturers may be jointly and severally liable with the manufacturer for damages. Nevertheless, subcontractors, raw material providers, and parts manufacturers have defenses to liability. 80

Law No. 31 of 1973 as amended, the “CPSL.”

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Recall Responsibilities

The JPLL does not contain a provision that expressly obligates a manufacturer to recall or repair a product found to be defective in a product liability lawsuit. However, the aforementioned CPSL grants government ministries the power to promulgate standards applicable to specific classes and types of products, to investigate complaints relating to particular products, compel manufacturers and importers to disclose information relating to allegedly unsafe products, and order product recalls or other remedial actions. For the majority of consumer products, the ministry that has regulatory oversight is the Ministry of Economy, Trade, and Industry (METI). Under the recently revised CPSL, a company is legally obligated to take some form of remedial action if their product causes a “serious product accident” to stop such accidents from further arising or spreading. Such action includes investigating the nature and cause of the accident, reporting the accident to a government Ministry, commencing a recall, repairing the product, or making a public announcement to warn consumers. A “product accident” is defined as any accident that is either (1) a product accident that damages the life or body of a consumer; or (2) a product accident in which a consumer product is destroyed or damaged, potentially causing life threatening or bodily injury to a consumer; and (3) which could have been caused by a product defect. In other words, in the case where an accident causes injury to person, property, or the product, unless it is clear that the cause is not due to a defect, the incident is deemed to be a product accident. A “serious product accident” means those product accidents in which the injury that occurs or may occur is serious, and the nature or appearance of the accident fulfils the criteria laid down by regulation. Criteria have since been promulgated by METI to include (1) fatal accidents; (2) product accidents causing injuries with after effects that take more than 30 days to heal; (3) fires; and (4) carbon monoxide poisoning. In the event of a product accident, whether and what steps the company might take are within the discretion of the company, but companies are strongly encouraged to file a report to METI and institute remedial actions that are appropriate under the circumstances. If at any time METI concludes that the remedial actions being taken by the company are insufficient in light of the potential or foreseeable danger associated with the product, METI may order the remedial actions it deems necessary. Such actions could include ordering the company to conduct a total or partial recall of the product, offer all purchasers component replacement or repair service, or place advertisements in national media to warn consumers of the danger. Aside from possible civil liability stemming from the failure to recall, repair, or warn consumers of a potential danger, violation of the CPSL or a Ministry order carries with it possible criminal fines and criminal prosecution of the company and its directors, officers, and employees. 2.7.4

The Burden for Proving Fault

Under the JPLL, the claimant has the burden of proving that the product is defective and that the defect was the cause of the claimant’s injuries. The manufacturer has the burden to prove any defenses.

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For claims brought under CCJ Article 709, again, the claimant bears the burden of proof and must show that the injury was caused by a defect in the product and that the manufacturer negligently or intentionally breached a duty owed to the claimant and this breach of duty caused damage to the claimant. Under contract law, the claimant must make a showing that the manufacturer breached the terms of the contract by supplying a product that failed to meet an express or implied warranty of the product and that the breach caused the injury to the claimant. The JPLL does not provide a specific test for causation. The standard test for causation found under the CCJ is applied by courts to product liability cases. When determining whether a causational relationship exists between a defective product and damage suffered by the claimant, the court will ask whether, but for the defect, the injury would not have been suffered. A manufacturer is liable only to the extent that the damages were generally foreseeable or specifically foreseeable to the manufacturer based on information known to the manufacturer. A manufacturer would not be liable for damages for only having wrongly exposed the claimant to an increased risk of injury known to be associated with the product unless the claimant can prove some sort of physical or mental injury.

2.7.5

Possible Defenses

Under the JPLL, once a claimant makes a showing that the product is defective, the manufacturer may assert one or more of the following defenses to either avoid liability or shift part or all of the liability to another party: the claim was brought beyond the three or ten-year statute of limitations; the product is not defective because the manner in which the claimant handled, used, or stored the product was, under the circumstances, unforeseeable misuse; the product is not defective because its design and manufacture meets or exceeds published safety guidelines and standards (such as the SG-Mark); the state of scientific or technical knowledge at the time when the manufacturer delivered the product was such that the existence of the defect identified by the claimant could not have been known; the defect did not exist at the time the product was delivered by the manufacturer; in the case of a failure to warn defect, the claimant is an experienced and knowledgeable user of the product; the defect was caused by defective components or raw materials supplied by a subcontractor; (in the case of a subcontractor) the components or raw materials that are said to have caused the defect were supplied pursuant to the specifications and instructions given by the final manufacturer and that the subcontractor was not negligent with respect to the occurrence of the defect; or the claimant’s injuries were not caused by the defective product. Under CCJ Article 722, the claimant’s own contributory negligence or assumption of the risk may be a partial or complete defense to liability. The state of scientific or technical knowledge could also be a factor in determining whether a manufacturer breached a duty owed to the claimant. In respect to breach of contract claims, standard defenses to breach of contract claims would be available.

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State of the Art Defense

A “state of scientific or technical knowledge” defense exists under the JPLL. If the manufacturer can prove that a defect in a product was undiscoverable or unknowable by the scientific and technical knowledge available at the time of delivery to the claimant, the product will not be found to be defective. However, this defense is narrowly interpreted by the courts. Courts require a showing by the manufacturer that none of the established knowledge or technology relevant to the product provided any suggestion or knowledge that such a danger might have existed. As a result, scientific or technical knowledge is not limited to the knowledge held by the individual manufacturer, but is deemed to include all scientific and/or technical knowledge at the time. The Quality-of-Life Policy Council under the Prime Minister’s Cabinet Office has taken the position that scientific and/or technological knowledge must be judged based on the highest standards of technology available at the time, thus placing on manufacturers a heavy evidentiary burden. To counter claimant’s showing that a product is defective, a manufacturer may argue that the product complies with relevant safety standards such as the SG-Mark standard or some other government regulation or guideline. Although such a defense may be persuasive to a court, it is not dispositive that no defect exists and the manufacturer may nonetheless be held liable for having delivered a defective product. 2.7.7

Contributory Fault

A manufacturer in a product liability suit may seek indemnification from a third party for losses that might be incurred in the future if such a manufacturer is found liable for having delivered a defective product. The manufacturer could accomplish this by filing a suit against such a third party and then seek to combine the proceedings. Combination of the two proceedings is at the discretion of the court. If the third party was not brought in as a third-party defendant in the original suit, a manufacturer could file a suit against the third party after the underlying product liability law suit was decided against the manufacturer. If indemnification is sought under a breach of contract theory, the law suit for indemnification must be filed within ten years from the date when the manufacturer paid the court-ordered damages to the injured party. CCJ Article 722, paragraph 2, empowers courts to take a claimant’s own negligence into account when calculating damages. Although not expressly provided in the JPLL, CCJ Article 722 would likewise permit a court to reduce a claimant’s damages in a product liability suit in the case where the claimant was partially negligent. In relation to contract claims, CCJ Article 418 grants courts the additional power to relieve a manufacturer of any liability where the claimant has been negligent. 2.7.8

Trial Procedure

Trials are by judges only. A hearing is held within 30 days of the filing of the law suit, but this is often delayed due to scheduling conflicts of the court. Trials in Japan are primarily conducted by written submission of the parties and oral arguments are rare. There is

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no continuous trial as one might see in a Common Law country such as the United States or the United Kingdom, but rather interspaced hearings, typically lasting less than 30 minutes, are held primarily to afford the parties opportunity to submit new documents and evidence directly to the court. As a result, getting to trial happens very quickly, but reaching a judgment in the first instance may take a few years, depending on the complexity of the matter. Japanese civil procedure does not provide for motion practice, so certain issues of fact or law may not be decided as preliminary issues. For example, there is no motion for summary judgment or dismissal. However, a court may close the trial proceedings and make a final judgment at anytime. A court may, sua sponte or upon petition of one of the parties, appoint an expert to testify. Additionally, parties may introduce expert testimony as part of their briefs and submissions to the courts. Expert testimony may be introduced as evidence at trial by any of the following methods. First, under the Kantei system, a party may make a request to the court for an expert opinion and the court may appoint an expert to testify. Second, each party may provide expert testimony from an expert of their own choosing either by examining the expert as a witness (Shounin-jinmon) at a court hearing or by submitting documentary evidence from the expert (Shoshou). Although each party is free to challenge the qualifications of the expert, the court does not have a Daubertlike gatekeeper duty to exclude unreliable expert testimony as in the case. If a witness is presented at a hearing, whether they are a fact or expert witness, the party presenting such a witness is required to give to the other party written notice containing a summary of the matter about which the witness will be called upon to discuss. The noncalling party will also have a chance to cross-examine at the hearing. 2.7.9

Class Action

Japanese civil procedure does theoretically allow class action suits where a single claimant represents other injured parties, but the requirements for the class are so stringent that forming a class is exceedingly difficult in the vast majority of situations and rarely accomplished. However, claimants with related claims against the same manufacturer may join the same law suit in some circumstances. The JPLL itself does not allow representative bodies to sue on behalf of individuals. However, since June 7, 2007, consumer groups recognized and authorized by the Japanese government, may, on behalf of consumers in general, seek injunctions to stop companies violating certain clauses of the CCL. 2.7.10

Discovery

Unlike Common Law countries such as the United States or the United Kingdom, there is neither a disclosure obligation nor right of discovery in Japan. There are, generally, four ways a party may be able to obtain documentary evidence: 1. Preservation of evidence motion; 2. Request through an attorney bar association;

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3. Court-ordered production of documents; and 4. An inquiry by a party. However, a party may refuse to produce documentary evidence where 1. The document contains information that the holder (or people that are closely related to the holder) has a right to refuse to testify about; 2. The document contains information on which the holder owes a professional duty of confidentiality; 3. The document is related to governmental affairs and the production of the document is against public interest or will materially affect the functioning of public duties; or 4. The document was made specifically for the purposes of the holder or relates to a criminal or juvenile delinquency matter. One of the greatest hurdles facing claimants in product liability cases is that the evidence needed to prove that a product is defective is held by the manufacturer and not easily discoverable. It is believed by many practitioners that this is an important factor as to why product liability lawsuits are not more common in Japan.

2.7.11

Statutes of Limitations

Generally, claims under the JPLL must be brought within a period of three years from the time when the injured person becomes aware of the damage and the responsible manufacture or a period of ten years from the time when the manufacturer delivered the product in the case where the injury or the manufacturer is unknown to the claimant. Claims under CCJ Article 709 follow a similar prescription of three and 20 years, respectively. Generally, contract claims must be brought within 10 years, but this period varies with the identity of the parties and nature of the contract.

2.7.12

Damages

The JPLL provides that a manufacturer shall be liable for damages to the life, limb, or property of the consumer. A manufacturer is not liable for damage to the product alone. In addition to physical injuries, compensation for mental damages (pain and suffering) (isharyou) caused by the injury caused by the defective product are also recoverable within the discretion of the court and are commonly awarded. Medical expenses and lost wages are also recoverable. Punitive damages are not recoverable in Japan. There is no maximum limit on the damages recoverable.

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Costs and Funding

As a general rule, court costs such as filing fees, the prevailing party’s travel expenses, document preparation fees, and so on, are borne by the loser of the suit. Otherwise, each party covers its own expenses. It is within the discretion of the court to award a reasonable portion of the prevailing party’s lawyer fees as part of the damages. By U.S. or U.K. standards, awards of attorney fees would not be viewed as especially generous. There exists a public entity called the Japan Judicial Support Center (Nihon Shihou Shien Sentaa) that may assist with attorneys’ fees and court costs for some claimants. To receive public funding from the source mentioned above, there must be some possibility of the requesting party winning the suit. The Japanese Bar Association allows Japanese lawyers to structure their fees so that a portion of compensation to be paid at the conclusion of the suit is dependent on the outcome of the law suit. However, lawyers are not allowed to bear the litigation costs of their clients until a judgment is entered.

3 Product Liability Law

As corporations initiate the product liability prevention effort, or get more involved in their own claims or product liability lawsuits, they will need to understand the various legal terms involved. Over the years I have had various individuals from manufacturing companies contact me as they became interested in developing their own program and ask whether they needed to go to Law School, and of course I would explain that it was not at all necessary. Over time they would just become more knowledgeable of the various terms that applied, but there are various reference books the key person should purchase and have available, such as Black’s Law Dictionary. Let us begin with the definition of “Product Liability.” This is defined as the legal liability of manufacturers and sellers to compensate buyers, users, and even bystanders, for damages or injuries suffered because of defects in purchased goods. This is basically a lawsuit against a manufacturer for products that are alleged to be defective. The next question then becomes, “What is a product?” Of course that would seem pretty logical at first glance, and would apply to the physical item that was purchased, but the product could be more than that. A product could be the instructions or operating manual supplied with the primary item, or the service or maintenance instructions provided, the warning labels applied to the physical product, advertisements or promotional brochures pertaining to the end product, or even a maintenance or field service function provided to the customer who purchased the product. These are all considered to be products that were supplied by a company, any one of which could now be considered defective in nature and become a liability to the company that supplied it.

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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Which leads us into the next question, “What parties could end up being liable or involved in a product liability lawsuit?” Again, we have the primary or final product manufacturer, but in addition it could also involve the component parts suppliers, material suppliers, distributors, manufacturer’s representatives, dealers, retailers and any other party that had any role in the development, distribution, marketing, or servicing of a specific product in question. All of these parties, or any combination, could be involved in a product liability lawsuit. This then launches the question “What are the terms for referencing the different parties in a product liability case?” Basically there are two different parties or sides in a product liability case, the plaintiff and the defendant(s). The plaintiff will always be the party initiating the lawsuit, or legally complaining about the product and the company that made or provided it, and the other side will be the parties trying to defend themselves against the complaint or allegations, known as the defendant(s), and codefendants in cases where there are multiple defendants. To gain a better understanding of what the courts expect from a manufacturer, it is best to read through portions of the Restatement (Third) of Torts.

3.1

RESTATEMENT THIRD OF TORTS1

In May of 1997, at the annual meeting of the American Law Institute, a final draft of the Restatement (Third) of Torts on Products Liability was approved and adopted, ending four years of debate and development. With the publication of the Third Restatement text in 1998, the legal landscape of product liability is destined to change once again. Some critics have suggested that the provisions of the Third Restatement are a proactive attempt to reshape product liability law with an anticonsumer angle, inspired by the current tort reform movements. Another commentator has opined that “manufacturers have long pushed for liabilitylimiting rules like (the need to prove a reasonable alternative design). . .(and) the proposed Restatement rule does not quite shift all the risks to the consumer, but . . . it represents a dramatic shift in that direction.” Given the controversy surrounding the adoption of this latest version of the Restatement, the reactions of the courts and state legislatures that adopt or reject the Third Restatement must be closely examined to determine the impact of this version on future product liability litigation. Unlike its predecessor, this version of the Restatement of Torts has attempted to separate and to clarify the different areas of product liability law. Section 402 of the Second Restatement was divided only into sections A and B, which allowed the courts to develop and define the areas of product liability now known as manufacturing defect and design defects. In contrast, the latest version of the Restatement is divided into 21 sections. This is a review of section 2 of the Third Restatement, which outlines the provisions regarding manufacturing defects, design

1

Federation of Insurance & Corporate Counsel Quarterly, by Ruff, Edward B III, Jurado, Sonia Raquel.

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defects, and defective warnings and instructions. Although the Restatement has been subject to much criticism, especially from the plaintiffs’ bar, for its purported slant towards manufacturers, the new provisions in fact provide advantages and disadvantages to both sides of product liability litigation. 3.1.1

Manufacturing Defects

3.1.1.1 Definition The Third Restatement defines a manufacturing defect as occurring when a “product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product.” Examples of “a departure from a product unit’s design specification” include “products that are physically flawed, damaged, or incorrectly assembled.” In a product liability lawsuit the plaintiff typically asserts that it is the failure to meet the design specifications that caused an injury. The Third Restatement applies this type of liability to manufacturers, as well as commercial sellers and product distributors, noting that defects may arise after manufacture while products are being shipped or in storage. “As long as the plaintiff establishes that the product was defective when it left the hands of a given seller in the distributive chain, liability will be attached to that seller.” Additionally, if a manufacturer delegates some aspect of the assembly to another party, that manufacturer may still be liable under the rules of vicarious liability. Thus, while the product design may be safe, a claim for manufacturing defect may still lie when one individual unit failed to conform to that design, and the deviation caused an injury. 3.1.2

From Negligence to Strict Liability

In the area of manufacturing defects, the Third Restatement has moved product liability away from negligence and towards “strict liability without fault.” Rather than focusing on the reasonableness of that manufacturer’s quality control efforts, liability is assigned based on the fact that a defect existed at all. In order to prevail, the plaintiff must demonstrate that a defect existed at the time the product left the manufacturer’s hands, and that the defect caused an injury. Notably, the Third Restatement makes no mention of any need to prove that a product is unreasonably dangerous or not reasonably safe. Overall, although the definition of a manufacturing defect has remained similar to that adopted by many courts, the imposition of strict liability represents a significant change. The Third Restatement also places strict liability for manufacturing defects on wholesalers and retailers. The rationale cited to support this position is that “product sellers as business entities are in a better position than are individual users and consumers to insure against such losses.” Additionally, local retailers who might pay damages to victims can in turn seek indemnity from manufacturers. Finally, this position is justified, because “holding retailers and wholesalers strictly liable creates incentives for them to deal only with reputable, financially responsible manufacturers and distributors. . .” Thus, any entity involved in the manufacturer, distribution, or sale of a defectively manufactured product will face strict liability in tort under the Third Restatement.

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Design Defects

3.1.3.1 Definition Under the Third Restatement, an action can be premised on a design defect when a plaintiff claims that the product “meets the manufacturer’s design specifications but raises the question whether the specifications themselves create unreasonable risks.” In this situation, the plaintiff does not claim there is a flaw in the unit; rather, the plaintiff attacks the overall design of the product as being unsafe and defective. In contrast to manufacturing defects, the Third Restatement has moved liability for design defects away from strict liability and toward a theory of negligence. The rationale behind this move is that, “such defects cannot be determined by reference to the manufacturer’s own design or marketing standards because those standards are the very ones that plaintiffs attack as unreasonable.” The Third Restatement recognizes that, “many product-related accident costs can be eliminated only by excessively sacrificing product features that make the products useful and desirable.” Therefore, it recommends an independent assessment of the product, balancing risk against utility. As a result, the court must determine whether the product design used by the manufacturer is a reasonably safe one in light of the product’s function and purpose, rather than assess whether the defect existed when the product left the manufacturer. 3.1.3.2 The Reasonable Alternative Design (RAD) The move from strict liability to negligence places a higher burden of proof on a plaintiff who proceeds under a design defect theory. The Third Restatement mandates (in comment d) that a risk – utility balancing test must determine the reasonableness of the manufacturer’s design. This test asks “whether a reasonable alternative design would, at reasonable cost, have reduced the foreseeable risks of harm posed by the product and, if so, whether the omission of the alternative design by the seller . . . rendered the product not reasonably safe.” Thus, the plaintiff must demonstrate two things: (1) that there was a reasonable alternative design (RAD) which, (2) if it had been used, would have reduced the chance of a foreseeable injury from that product. The manufacturer will be liable in a design defect action based on its failure to adopt a feasible and safer design. The Third Restatement clearly requires that the plaintiff must prove a RAD is possible, but it is equally clear that a plaintiff is not required to produce a prototype. The testimony of a qualified expert on the feasibility of the alternative design is sufficient to meet the plaintiff’s burden of proof, “if it reasonably supports the conclusion that a reasonable alternative design could have been practically adopted at the time of sale.” The Third Restatement also suggests that in cases where the feasibility of an alternative design is obvious, expert testimony may not even be necessary. In order to meet the burden of proof, the plaintiff need only show sufficient evidence such that, “reasonable persons could conclude that a reasonable alternative could have been practically adopted.” Once the plaintiff has met this threshold, the jury must decide a question of fact: whether the alternative design was actually feasible and should have been implemented.

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Defenses

The “State of the Art” defense is a theory used in some jurisdictions to defeat a product liability action. This defense posits that the design used by the manufacturer was the most advanced and safest design at the time the product was made. Therefore, the product could not be defective because it used cutting-edge technology at the time the design was implemented. In the Third Restatement, the reporters clarify that although this evidence may be relevant to the issue of feasibility of the plaintiff’s RAD, proving that a design is state of the art is not a complete defense to a product liability action, in and of itself. “When a defendant demonstrates that its product design was the safest in use at the time of sale, it may be difficult for the plaintiff to prove that an alternative design could have been practically adopted.” However, as comment d clarifies, even if a design was clearly on the cutting edge at the time of distribution, “if the plaintiff introduces expert testimony to establish that a reasonable alternative design could practically have been adopted, a trier of fact may conclude that the product was defective notwithstanding that such a design was not adopted by any manufacturer, or even considered for commercial use, at the time of sale.” Thus, although evidence of state-of-the-art design is relevant, it will not offer a complete defense to a product liability action.

3.1.5

Defective Instructions and Warnings

A product can also be considered defective if the warnings or instructions that accompany the unit do not apprise the consumer of the foreseeable risks involved with the use of that product. “A product is defective because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller . . . and the omission of the instructions or warnings renders the product not reasonably safe.” Under this theory, the Third Restatement maintains a negligence theory of liability. In order to prevail on the theory of defective warnings, the plaintiff must show that adequate warnings of foreseeable risks were not provided. The Restatement provides that warnings must be given, “for inherent risks that reasonably foreseeable product users and consumers would reasonably deem material or significant in deciding whether to use or consume the product.” When analyzing the reasonableness of these warnings, the court should, “focus on various factors, such as content and comprehensibility, intensity of expression, and the characteristics of expected user groups.” The rationale behind the warning requirement is “. . . to protect the interests of those reasonably foreseeable users or consumers who would, based on their own reasonable assessment of the risks and benefits, decline product use . . .” Therefore, a manufacturer can be liable for defective warnings and instructions if it fails to apprise a consumer of all the risks of using the product. A manufacturer, however, has no duty to warn a user of an open and obvious risk. “A product seller is not subject to liability for failing to warn or instruct regarding risks . . . that should be obvious to, or generally known by, foreseeable product users.” This position was advanced in the Wisconsin decision in Schilling v. Blount, Inc. In that

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case, the decedent was injured when he was accidentally struck by one of the defendant’s bullets. The plaintiff claimed that the manufacturer was negligent in failing to warn of the dangers of handling and using loaded firearms. Finding for the manufacturer, the court held: “as a matter of law . . . there is no duty to warn of an inherent danger that is open and obvious to the community at large.” It should be noted, however, that warnings cannot be used to make an unreasonably dangerous product safe. “When a safer design can reasonably be implemented, . . . , adoption of the safer design is required over a warning that leaves a significant residuum of risks.” If a RAD exists that would eliminate the risk of harm, providing adequate instructions and warnings will not make the product safe. Therefore, a manufacturer will be liable for failing to implement a RAD, even if the warnings and instructions fully apprise the consumer of all of the risks. 3.1.6

Conclusions and Implications

The Third Restatement has substantially altered the landscape of product liability law. Although critics have labeled the revisions as “pro-defendant” and “anti-consumer,” the Restatement provisions in fact have created difficulties and improvements for litigants on both sides of a product liability action. In the area of manufacturing defects, consumer plaintiffs have gained a reduced burden of proof with the implementation of strict liability, while defendant manufacturers will face the burden of proving that the alleged defects were not in existence when the product left their possession. In the area of design defects, plaintiffs now face the added hurdle of proving that a reasonable alternative design existed and was feasible at the time the product was designed. While this showing has been elevated to an element of the prima facie case, most “good practitioners knew they wouldn’t dare go in front of a jury without a reasonable alternative design,” even prior to the adoption of the Third Restatement. On the other hand, manufacturers have been harmed by the loss of the “state of the art” and “open and obvious” defenses. Although evidence of these factors is still relevant, they will no longer offer a complete defense to a design defect claim. Overall, the provisions of the Third Restatement seem to refine existing theories of liability; they also direct the future of product liability law and its litigation.

3.2 3.2.1

COMMONLY USED TERMS AND DEFINITIONS Attorney – Client Privilege

This is an evidentiary rule that protects both attorneys and their clients from being compelled to disclose confidential communications between them made for the purpose of furnishing or obtaining legal advice or assistance. The privilege is designed to foster frank, open, and uninhibited discourse between attorney and client so that the client’s legal needs are competently addressed by a fully prepared attorney who is cognizant of all the relevant information the client can

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provide. The attorney –client privilege may be raised during any type of legal proceeding—civil, criminal, or administrative—and at any time during those proceedings, pretrial, during trial, or post-trial. 3.2.2

Breach of Contract

This is the failure, without legal excuse, to perform any promise that forms the whole or part of a contract. 3.2.3

Breach of Warranty

A Warranty is basically an assurance by one party that certain facts are true regarding the character, quality, or fitness of goods sold as they are represented to be, which the other party may rely upon. When a product liability lawsuit is based on a Breach of Warranty, it alleges that the defendant was in violation of an express, implied, or contract warranty relating to quality, content, or condition of goods sold. 3.2.4

Complaint

The complaint is the original or initial pleading by which an action is commenced under codes or Rules of Civil Procedure. It is the pleading which sets forth a claim for relief. Such a complaint shall contain: (1) a short and plain statement of the grounds upon which the court’s jurisdiction depends, (2) a short and plain statement of the claim showing that the pleader is entitled to relief, and (3) a demand for judgment for the relief to which he deems himself entitled. 3.2.5

Compensatory Damages

Compensatory damages are such as will compensate the injured party for the injury sustained, and nothing more; such as will simply make good or replace the loss caused by the wrong or injury. The rationale behind compensatory damages is to restore the injured party to the position he or she was in prior to the injury. 3.2.6

Consequential Damages

These are damages that are not a direct result of an act, but a consequence of the initial act. To be awarded consequential damages in a lawsuit, they must be a foreseeable result of an act. In a contractual situation, consequential damages resulting from the seller’s breach include any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover (obtaining a substitute) or otherwise. Many warranties seek to exclude or limit consequential damages, such as exclusion for loss of time, inconvenience, loss of use of the vehicle or commercial loss in car warranties.

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3.2.7

Contingency Fee

A contingency fee is a fee that is used by plaintiff lawyers in most personal injury cases. It is contingent when the fee is conditioned upon the attorney’s successful resolution of the client’s case. A contingency fee is paid as a percentage of the plaintiff’s monetary recovery or jury award. A contingency fee is what is meant when you hear, “there is no fee unless there is a recovery.” Contingency fees can be between 33.3 and 40 percent of what the plaintiff wins in a product liability case. 3.2.8

Contributory Negligence

This is the act or omission amounting to want of ordinary care on the part of the complaining party, which, concurring with the defendant’s negligence, is the proximate cause of injury. It is also the conduct by a plaintiff that is below the standard to which he is legally required to conform for his own protection and which is a contributing cause that cooperates with the negligence of the defendant in causing the plaintiff’s harm. 3.2.9

(The) Daubert Decision and Kumho Tire

The Daubert decision is a legal precedent set in 1993 by the Supreme Court of the United States regarding the admissibility of expert witnesses’ testimony during legal proceedings. The citation is Daubert v. Merrell Dow Pharmaceuticals, 509 U.S. 579 (1993). The Daubert decision was heralded by many observers as one of the most important Supreme Court decisions of the last century, imparting crucial legal reforms to reduce the volume of what has disparagingly been labeled junk science in the court room. In the Daubert case, Merrell Dow Pharmaceuticals, Inc., a subsidiary of Dow Chemical Company, was sued by a mother whose baby Jason Daubert had a congenital disorder. He was born in 1974 having only two fingers on his right hand and without a lower bone on his right arm. His mother had taken Bendectin, an antinausea drug made by Merrell Dow, during her pregnancy. Bendectin had been introduced in 1957 to alleviate nausea associated with pregnancy and over the next quarter of a century was used by more than 33 million women all over the world. A significant number of children born to these women suffered birth defects, and the drug’s manufacturer—Merrell National Laboratories and its successor Merrell Dow—found itself involved in over a thousand lawsuits, the first major one of which was filed in 1977. Another family, the Schullers, brought a less widely known case against Merrell Dow. Their child, Eric Schuller, also of San Diego, was born in 1981 without a left hand and with one leg shorter than the other. Merrell Dow moved for summary judgment, claiming Bendectin had not caused the child’s disorder. In the affidavit authored by Dr. Steven H. Lamm, the author testified that he had reviewed multiple published human studies and concluded the use

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101

of Bendectin during the first trimester of pregnancy was not supposed to be a health risk. In response to Merrell Dow’s affidavit, the plaintiff presented eight affidavits based solely on animal testings, claiming the existence of a link between Bendectin and animal birth defects. The court granted summary judgment for Merrell Dow and dismissed the case, finding Daubert’s experts relied on evidence “not sufficiently established to have general acceptance in the field to which it belongs.” The Court held that expert opinion that was not based on data from the field of epidemiology concerning Bendectin was not admissible to raise an issue regarding causation (in law) to the jury. In addition, the Court also ruled that although Daubert’s experts recalculated data obtained from previously published epidemiologic studies, their findings were not considered admissible because they were neither published nor subjected to peer review. The plaintiffs appealed the decision, and, in due course, the case reached the U.S. Supreme Court. The Supreme Court did not apply their new Daubert standard to the case, but rather reversed the decision and remanded the case to the Ninth Circuit court. On remand, the Ninth Circuit applied the Daubert standard and again granted summary judgment for the defendant. In Daubert, the Supreme Court held that federal trial judges are the “gatekeepers” of scientific evidence. Under the Daubert standard, therefore, trial judges must evaluate proffered expert witnesses to determine whether their testimony is both relevant and reliable, a two-pronged test of admissibility. †

†

The Relevancy Prong. The relevancy of a testimony refers to whether or not the expert’s evidence fits the facts of the case. For example, you may invite an astronomer to tell the jury if it had been a full moon on the night of a crime. However, the astronomer would not be allowed to testify if the fact that the moon was full was not relevant to the issue at hand in the trial. The Reliability Prong. The Supreme Court explained that in order for expert testimony to be considered reliable, the expert must have derived his or her conclusions from the scientific method (Daubert v. Merrell Dow Pharmaceuticals, Inc. (1993) 509 U.S. 579, 589.) The Court offered “general observations” of whether proffered evidence was based on the scientific method, although the list was not intended to be used as an exacting checklist: – The theory or technique must be falsifiable, refutable, and testable empirical testing; – It must be subjected to peer review and publication; – There must be a known or potential error rate and the existence and maintenance of standards concerning its operation; – It must be established whether the theory and technique is generally accepted by a relevant scientific community.

Although trial judges have always had the authority to exclude inappropriate testimony, previous to Daubert, trial courts often preferred to let juries hear evidence

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proffered by both sides.1 Once certain evidence has been excluded by a Daubert motion because it fails to meet the relevancy and reliability standard, it will likely be challenged when introduced again in another trial. Even though a Daubert motion is not binding to other courts of law, if something was found not trustworthy, other judges may choose to follow that precedent. The Daubert Court had articulated a four-part test for the admissibility of expert scientific testimony, and under the new ruling captioned Kumho Tire Company, Ltd. v. Carmichael, Daubert’s general principles are to be applied flexibly to the evaluation of all expert testimony proffered in federal courts. 3.2.10

Defendant

This is the person, company, or entity that is being sued. This is the party against whom relief of recovery is being sought. In some states, or in certain types of actions, the defendant is called the respondent. 3.2.11

Depositions

In law, a deposition is evidence given under oath and recorded for use in court at a later date. In many countries depositions are given in courtrooms, but in the United States they are given outside a courtroom in certain well defined circumstances. In the United States it is a part of the discovery process in which litigants obtain information from each other in preparation for trial. In U.S. judicial proceedings in federal court, the procedure for taking depositions is set forth in Rule 30 of the Federal Rules of Civil Procedure and corresponding provisions in states that have adopted the Federal Rules. If the person requested to testify (deponent) is a party to the lawsuit or someone who works for an involved party, notice of time and place of the deposition can be given to the other side’s attorney, but if the witness is an independent third party, a subpoena must be served on him/her if he/she is reluctant to testify. The person to be deposed (questioned), known as the deponent, is usually notified to appear at the appropriate time and place by means of a subpoena. A court reporter, also known as a stenographic reporter (sometimes denoted CSR for certified stenographic reporter) is present and begins the proceedings by administering the same oath or affirmation that the deponent would take if the testimony were being given in court in front of a judge and jury. Thereafter, the court reporter makes a verbatim stenographic record of all that is said during the deposition, in the same manner that witness testimony is recorded in court. Many CSRs nowadays also make an audio or video recording. Attorneys for the nondeposing litigant are often present, although this is not required in all jurisdictions. The attorney who has ordered the deposition begins questioning of the deponent (this questioning is referred to as “direct examination” or “direct” for short). As nods and gestures cannot be recorded, the witness is instructed to answer all questions aloud. After the direct examination, other attorneys in attendance cross-examine the witness. The first attorney may ask more questions at the end, in redirect, which may be followed by recross.

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During the course of the deposition, one attorney or another may object to questions asked. In most jurisdictions, only two types of objections are allowed: to assert a privilege and to object to the form of the question asked. Objections to form are frequently used to signal the witness to be careful in answering the question. All other objections, in particular those involving the rules of evidence, are generally preserved until trial. They need not be made at the deposition. The chief value of a deposition, as with any discovery proceeding, is to give all litigant parties in a contested case a fair preview of the evidence so that a level playing field is achieved and surprise (traditionally regarded as an unfair tactic) is avoided at the time of trial. Another benefit of deposition is to preserve a witness’s recollection while it is still fresh, though the trial may still be some time later. In the event a witness is unavailable for trial, his deposition testimony may be read before the jury and made part of the record in the case, with the same legal force as live testimony. In some states, depositions can be offered into evidence even if the witness is available. In any case, one party can use a deposition to impeach (or contradict) the witness’s testimony in open court. Some depositions are videotaped, in anticipation of the unavailability of a witness at trial, so that if necessary the videotape may be played for judge and jury. Sometimes, after a number of witnesses have been deposed, the parties will have enough information that they can reasonably predict the outcome of a prospective trial, and may decide to arrive at a compromise settlement, thus avoiding trial and preventing additional costs of litigation. Accordingly, although most depositions are not videotaped, it may be of value for parties to make a positive impression on the opposing side’s lawyers with respect to affect and appearance because these are telling factors as to how that person will present in front of a jury.

3.2.12

Design Defect

When a product is found or proven to be defective, and the defect is in the initial design specification as opposed to the manner in which the product was manufactured, it is then recognized as a design defect. In this scenario all of the products manufactured are therefore defective, which can prove to be more catastrophic than having a portion of the final population of product being defective.

3.2.13

Discovery

See request for documents.

3.2.14

Expert Witness

One who by reason of education or specialized experience possesses superior knowledge respecting a subject about which persons having no particular training are incapable of forming an accurate opinion or deducing correct conclusions.

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One skilled in any particular art, trade, or profession, being possessed of peculiar knowledge concerning the same, and one who has given the subject in question particular study, practice, or observation. 3.2.15

Federal Rules of Evidence

Rule 701: Opinion Testimony by Lay Witnesses. If the witness is not testifying as an expert, the witness’s testimony in the form of opinions or inferences is limited to those opinions or inferences that are (a) rationally based on the perception of the witness, (b) helpful to a clear understanding of the witness’s testimony or the determination of a fact in issue, and (c) not based on scientific, technical, or other specialized knowledge within the scope of Rule 702. Rule 702: Testimony by Experts. If scientific, technical, or other specialized knowledge will assist the trier of fact to understand the evidence or to determine a fact in issue, a witness qualified as an expert by knowledge, skill, experience, training, or education, may testify thereto in the form of an opinion or otherwise, if (1) the testimony is based upon sufficient facts or data, (2) the testimony is the product of reliable principles and methods, and (3) the witness has applied the principles and methods reliably to the facts of the case. Rule 703: Bases of Opinion Testimony by Experts. The facts or data in the particular case upon which an expert bases an opinion or inference may be those perceived by or made known to the expert at or before the hearing. If of a type reasonably relied upon by experts in the particular field in forming opinions or inferences upon the subject, the facts or data need not be admissible in evidence in order for the opinion or inference to be admitted. Facts or data that are otherwise inadmissible shall not be disclosed to the jury by the proponent of the opinion or inference unless the court determines that their probative value in assisting the jury to evaluate the expert’s opinion substantially outweighs their prejudicial effect. Rule 704: Opinion on Ultimate Issue. (a) Except as provided in subdivision (b), testimony in the form of an opinion or inference otherwise admissible is not objectionable because it embraces an ultimate issue to be decided by the trier of fact. (b) No expert witness testifying with respect to the mental state or condition of a defendant in a criminal case may state an opinion or inference as to whether the defendant did or did not have the mental state or condition constituting an element of the crime charged or of a defense thereto. Such ultimate issues are matters for the trier of fact alone. Rule 705: Disclosure of Facts or Data Underlying Expert Opinion. The expert may testify in terms of opinion or inference and give reasons therefor without first testifying to the underlying facts or data, unless the court requires otherwise. The expert may in any event be required to disclose the underlying facts or data on cross-examination.

3.2

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105

Frye Test

In Frye v. United States, 293 F. 1013 (DC Cir. 1923), a federal case decided by the District of Columbia Circuit in 1923, the DC Circuit considered the admissibility of testimony based on the systolic blood pressure test, a precursor of the modern polygraph. The court announced that a novel scientific technique “must be sufficiently established to have gained general acceptance in the particular field in which it belongs.” The court found that the systolic test had “not yet gained such standing and scientific recognition among physiological and psychological authorities.” Thus, under the Frye standard, it is not enough that a qualified individual expert, or even several experts, testify that a particular technique is valid. Frye imposes a special burden: the technique must be “generally” accepted by the relevant scientific community. The general acceptance test requires a two-step analysis: first, identifying the field in which the underlying principle falls, and second, determining whether that principle has been generally accepted by members of the identified field. Neither step is free of difficulties. The first step can be problematic. Many scientific techniques do not fall within the domain of a single academic discipline or professional field. Consequently, selecting the proper field may prove troublesome. Once the relevant field has been identified, the second step requires determining whether the technique has been generally accepted by members of that field. The percentage of those in the field who must accept the technique has never been clearly specified. A criticism of the general-acceptance test is that it exacts too high a cost and often bars the admission of reliable evidence. Critics of Frye assert that the delay to permit the technique to win general acceptance “precludes too much relevant evidence for purposes of the fact determining process” (United States v. Sample, 378 F. Supp. 43, 53 (E.D. Pa. 1974)). In contrast, courts favoring the general-acceptance test recognize its conservative nature but believe that this aspect does not exact an “unwarranted cost” (United States v. Addison, 498 F.2d 741, 743 (DC Cir. 1974)). The California Supreme Court has stated that the “primary advantage . . . of the Frye test lies in its essentially conservative nature” (People v. Kelly, 549 P.2d 1240, 1245 (Cal. 1976)). The criticism that the Frye test is too conservative begs a question. The question is not whether the Frye test is conservative (which it is), but whether other standards would better accomplish the objective of preventing the admission of unreliable scientific evidence.

3.2.17

Incidental Damages

Damages are sometimes awarded in a lawsuit for a breach of contract as compensation for commercially reasonable expenses incurred as a result of the other party’s breach, such as costs of inspecting and returning goods that do not conform to contract specifications. Incidental damages are added to compensatory damages. For transactions governed by the Uniform Commercial Code (UCC), the UCC provides that “Incidental damages to an aggrieved seller include any commercially reasonable charges, expenses, or commissions incurred in stopping delivery, in the

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transportation, care, and custody of goods after the buyer’s breach, in connection with return or resale of the goods or otherwise resulting from the breach.” 3.2.18

Indemnify

The purpose of this is †

†

To restore the victim of a loss, in whole or in part, by payment, repair, or replacement; To save harmless, to secure against loss or damage; to give security for the reimbursement of a person in case of an anticipated loss falling upon him.

An indemnity is a contractual or equitable right under which the entire loss is shifted from a tortfeasor who is only technically or passively at fault to another who is primarily or actively responsible. 3.2.19

Interrogatories

Interrogatories (also known as Requests for Further Information) are a formal set of written questions propounded by one litigant and required to be answered by an adversary, in order to clarify matters of evidence and help to determine in advance what facts will be presented at any trial in the case. The vast majority of such questions are to find background information about the litigants that is not specific to each case, so it is common to use preprinted forms containing standard questions that are generally relevant to the type of case at hand, called form interrogatories. These may even be determined by statute or court rules. In the United States, use of interrogatories is governed by the law where the case has been filed. All federal courts operate under the Federal Rules of Civil Procedure, which places various limitations on the use of this device, permitting individual jurisdictions to limit interrogatories to 25 questions per party. California, on the other hand, operates under the Civil Discovery Act in the California Code of Civil Procedure. The statutes allow up to 35 special interrogatories per party, but this limit may be exceeded simply by filing a declaration of necessity. 3.2.20

Litigation

This is a lawsuit. It is legal action, including all proceedings therein. A corporation enters into the litigation phase as soon as they receive the Complaint. 3.2.21

Manufacturing Defect

When a product is found or proven to be defective, the question arises as to whether it was defective by design, or whether it represents a manufacturing defect. When products are initially designed and engineered, exact specifications pertaining to the

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components and materials to be used, assembly and construction, processing steps, and many other aspects of the finished product will be established. A product that is found to be a departure from such specification is therefore described as having a “manufacturing defect.” The question then becomes, “What percentage of the total population of product carries the defective condition?”

3.2.22

Misrepresentation or Fraud

This is the presentation of false information or fact, which, if accepted, leads the mind to an apprehension of a condition other and different from that which exists.

3.2.23

Negligence and Strict Liability

When a plaintiff initiates a product liability lawsuit it will largely be based on either the theory of “Negligence” or “Strict Liability.” The theory of Negligence is based on a manufacturer or anyone in the chain of production or distribution exercising reasonable care in design, manufacture, testing, and servicing as well as warning of dangers in its products and providing adequate instructions. Or, from another perspective, it is the failure to use such care as a reasonably prudent person would use under similar conditions. So a product liability lawsuit based on negligence would imply that one or more of these requirements was not met by one or more of the parties. The theory of strict liability centers around the product being sold in a defective or unreasonably dangerous condition to the user, and is not suitable for its intended use. In a strict liability case “fault” would not need to be determined. The plaintiff would just need to prove that the product was defective when placed into the stream of commerce. A simple example of this would be when a person bites into a hamburger and is injured or chokes on a wire contained in the hamburger meat. The plaintiff in this case would only need to prove it was actually there when they purchased the hamburger and it did cause injury, but they would not have to determine or prove the negligent theory of how it got there in the first place. In the comparison of the two theories, negligence focuses on conduct or fault whereas strict liability focuses on the original condition of product. Fault is not relevant.

3.2.24

Plaintiff

A plaintiff is the person who initiates a court action by filing a complaint with the clerk of the court against the defendant(s), demanding damages, performance, and/or court determination of rights. A plaintiff is sometimes called a petitioner. It is the party who begins an action, the party who complains or sues in an action and is named as such in the court’s records.

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3.2.25

Punitive Damages

This is an enhancement of compensatory damages awarded to a plaintiff when the court finds the defendant was wanton, reckless, malicious, or oppressive in their actions. It is meant as a punishment for outrageous conduct. The plaintiff has the burden of proving that punitive damages should be awarded, and the amount, by a preponderance of the evidence. In order to succeed, the plaintiff must prove that the defendant’s conduct was malicious or in reckless disregard of the plaintiff’s rights. The relationship between the amount of punitive and compensatory damages awarded in any given case has been prominent in the policy debate, and some federal and state judiciaries and legislatures use the amount of compensatory damages awarded as one factor in judging the reasonableness of the punitive award. Because punitive damages are awarded in a fraction of all verdicts, they are less frequent, and thus less predictable, than compensatory awards. The question often arises as to who receives punitive damage awards. They are awarded to the plaintiff, with the plaintiff’s attorney also receiving a percentage.

3.2.26

Request for Documents, Discovery

These are pretrial devices that can be used by one party to obtain facts and information about the case from the other party in order to assist the party’s preparation for trial. Each party, through the law of civil procedure, can request documents and other evidence from other parties or can compel the production of evidence by using a subpoena or other discovery devices, such as requests for production and depositions. Under the law of the United States, civil discovery is wide-ranging and can involve any material that is relevant to the case, excepting information that is privileged, information that is the work product of the opposing party, or certain kinds of expert opinions. Electronic discovery or “e-discovery” is used when the material is stored on electronic media. General Provisions Governing Discovery †

†

Subdivision (a) provides for automatic disclosure, which was first added in 1993. Disclosure requires parties to share their own supporting evidence without being requested to by the other party. Failure to do so can preclude that evidence from being used at trial. This applies only to evidence that supports their own case, not anything that would harm their case. Subdivision (b) is the heart of the discovery rule, and defines what is discoverable and what is limited. Anything that is relevant is available for the other party to request, as long as it is not privileged or otherwise protected. Relevance is defined as anything more or less likely to prove a fact that affects the outcome of the claim. It does not have to be admissible in court as long as it could reasonably lead to admissible evidence. However, there are limits to

3.2

† †

†

†

†

COMMONLY USED TERMS AND DEFINITIONS

109

discovery. The Provisions allow the court to alter the limits of discovery on the number of depositions, interrogatories, and document requests, if it determines that the discovery sought is overly burdensome, redundant, unnecessary, or disproportionately difficult to produce with respect to the importance of the case or specific issue. Enshrined in Provision 3, the work-product doctrine protects tangible (and some intangible) items created in anticipation of the litigation (e.g., a memorandum from an attorney outlining his strategy in the case). Protecting work product is considered in the interest of justice because discovery of such work product would expose an attorney’s complete legal strategy before trial. Provision 4 allows discovery of experts whose opinions may be presented at trial, but limits discovery of experts not likely to testify during trial. Provision 5 generally prohibits the discovery of any material legally privileged (attorney – client, etc.), and requires the production of a “privilege log,” which describes the privileged information or material in a way that allows others to see that (if) it is privileged, but does not divulge the privileged material. Subdivision (c) provides for protective orders. Subdivision (d) specifies the times at which parties may employ the various methods of discovery. Subdivision (e) provides for supplementation, which requires a person to correct any submitted information as it is necessary. For example, if you submit your medical records, and then your doctor calls you to say a crucial medical test just came in, you may be required to send that new report to the other party without being specifically requested to do so. Subdivision (f) provides a special meeting between the parties to organize their discovery process; this is a required step. Subdivision (g) is the good faith rule, which provides sanctions to any party that makes a discovery request or response designed to thwart justice, cause undue delay, or harass the other party.

3.2.27

State of the Art

In the context of a products liability case it means the level of pertinent scientific and technical knowledge existing at the time of manufacture. 3.2.28

Statutes of Limitations and Repose

Statutes of limitations are statutes of the federal government and various states setting maximum time periods during which certain actions can be brought or rights enforced. After the time period, as set out in the applicable statute of limitations, has run, no legal action can be brought regardless of whether any cause of action ever existed. Statutes of repose limit the time a plaintiff has to initiate a lawsuit after an arbitrary, product-related event, such as the time after the product was initially

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TABLE 3.1 Statutes of Limitations and Repose Statutes of Limitations Injury (years)

Property Damage (years)

Alabama

2

6

Alaska

2

2

Arizona

2

2

Arkansas

3

3

California

2

3

Colorado

2

2

Connecticut

3

3

Delaware

3

2

DC

3

3

Florida

4

4

Georgia

2

4

State

Statutes of Repose An action must be brought within one year from the time when the injury is or should have been discovered. An action must be brought within two years from the time when the injury is or should have been discovered. An action must be brought within two years from the time when the injury is or should have been discovered. The state has enacted a 12-year statute of repose that begins to run once the product is first sold. The statute of repose does not apply to actions based on negligence or breach of warranty. An action must be brought within three years from the time when the injury is or should have been discovered. An action must be brought within two years from the time when the injury is or should have been discovered. An action must be brought within two years from the time when the injury is or should have been discovered. An action must be brought within two years from the time when the injury is or should have been discovered. The state has enacted a 10-year statute of repose that begins to run once the manufacturer or seller has last parted with the product. An action must be brought within two years from the time when the injury is or should have been discovered. An action must be brought within three years from the time when the injury is or should have been discovered. An action must be brought within two years from the time when the injury is or should have been discovered. The state has enacted a 12-year statute of repose, subject to various exceptions. An action must be brought within two years from the time when the injury is or should have been discovered or one year from the date on which death has occurred. The state has enacted a 10-year statute of repose, subject to various exceptions. (Continued )

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TABLE 3.1 Continued Statutes of Limitations Injury (years)

Property Damage (years)

Hawaii

2

2

Idaho

2

3

Illinois

2

5

Indiana

2

2

Iowa

2

5

Kansas

2

2

Kentucky

1

2

Louisiana

1

1

Maine

6

6

Maryland

3

3

Massachusetts

3

3

Michigan

3

3

Minnesota

6

6

Mississippi

3

3

Missouri

5

5

State

Statutes of Repose An action must be brought within two years from the time when the injury is or should have been discovered. An action must be brought within two years of the date on which the injury occurred. The state has enacted a 10-year statute of repose, subject to various exceptions. An action must be brought within two years of the date on which the injury occurred. The state has enacted a 12-year statute of repose that begins to run once the product is sold and a 10-year statute of repose that begins to run once the product is delivered to the first owner. An action must be brought within two years of the date on which the injury occurred. The state has enacted a 10-year statute of repose. An action must be brought within two years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. An action must be brought within one year of the date on which the injury occurred. If injury, death, or property damage does not occur within eight years of the product’s use, then this creates a rebuttable presumption that the product does not contain a defect. An action must be brought within one year of the date on which the injury occurred. This statute does not apply to minors. An action must be brought within six years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. If a product is in use for more than 10 years, then liability cannot be based on strict liability. An action must be brought within four years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. An action must be brought within five years of the date on which the injury occurred. (Continued )

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TABLE 3.1 Continued Statutes of Limitations Injury (years)

Property Damage (years)

Montana

3

2

Nebraska

4

4

Nevada

2

3

New Hampshire

3

3

New Jersey

2

6

New Mexico

3

4

New York

3

3

North Carolina

3

3

North Dakota

6

6

Ohio

2

2

Oklahoma

2

2

10

10

Pennsylvania

2

2

Rhode Island

3

10

South Carolina

3

3

South Dakota

3

6

State

Oregon

Statutes of Repose An action must be brought within three years of the date on which the injury occurred. An action must be brought within four years of the date on which the injury occurred. The state has enacted a 10-year statute of repose, which begins to run from the date in which a product is first sold. An action must be brought within four years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred, except where a legal duty has been imposed by the government, in which case the action must be brought within six years. The state has enacted a 12-year statute of repose, which begins to run once the product is manufactured and sold. An action must be brought within two years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within six years from the date of the initial purchase. An action must be brought within 10 years from the date of the initial purchase or within 11 years of the date of manufacture. An action must be brought within two years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. The state has enacted an eight-year statute of repose. An action must be brought within two years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. The state has enacted a six-year statute of repose, which begins to run after purchase. (Continued )

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113

TABLE 3.1 Continued Statutes of Limitations Injury (years)

Property Damage (years)

Tennessee

1

3

Texas

2

2

Utah

4

3

Vermont

3

3

Virginia

2

5

Washington

3

3

West Virginia

2

2

Wisconsin

3

6

Wyoming

4

4

State

Statutes of Repose An action must be brought within four years of the date on which the injury occurred. The state has enacted a statute of repose that runs six years after an injury and 10 years after the initial purchase of a product. An action must be brought within two years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. An action must be brought within two years of the date on which the injury occurred. The state has enacted a 12-year statute of repose. An action must be brought within two years of the date on which the injury occurred. An action must be brought within three years of the date on which the injury occurred. An action must be brought within four years of the date on which the injury occurred.

manufactured, or the sale of the product, delivery, consumption, or use of the product. By providing manufacturers with a defined time period after which they would no longer be liable for injuries caused by their products the statutes are intended to primarily serve as a defense over liability for actions committed many years in the past. Unlike the statute of limitation, a statute of repose can expire before the accrual of a cause of action. Many of the state statutes provide exemptions, so despite their intended purpose, a defendant generally receives little benefit from the statutes. A plaintiff in each state must bring an action within a certain period of time prescribed in the state’s statute of limitations. In most states, the time period begins when the plaintiff discovered or should have discovered his or her injury, under what is known as the discovery rule. A few states begin this time period when the injury actually occurred. Some states have also enacted statutes of repose, which bar actions that are not brought within a specified period of time after some event has occurred, such as the initial sale of a product. (It should be noted that the following statutes in Table 3.1 are under constant review and are always subject to change).

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3.2.29

PRODUCT LIABILITY LAW

Strict Liability

See Negligence and Strict Liability (Section 3.2.23). 3.2.30

Subrogation

The substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities. The right of one who has paid an obligation which another should have paid to be indemnified by the other. 3.2.31

Tort

A private or civil wrong or injury, including action for bad faith breach of contract, for which the court will provide a remedy in the form of an action for damage. 3.2.32

Work Product Rule

Under this rule any notes, working papers, memoranda, or similar materials, prepared by an attorney in anticipation of litigation, are protected from discovery. Most states have codified the work product rule in some form either by statute or court rule. This rule has been interpreted to include private memoranda, written statements of witnesses, and mental impressions of personal recollections prepared or formed by attorney in anticipation of litigation or for trial.

4 New Product Introduction: More Effective Design Reviews The design review is the most important first step in a product’s lifecycle. It is the ideal and least expensive time to recognize and propose changes or improvements to the conceptual design. Still, many management teams will conduct inadequate reviews, if any review at all, either because they feel they already know enough to preclude holding any design analysis, or because they feel there is not enough time because of their hectic schedules. Problems discovered during manufacturing, and especially after the product has been released to the field, are typically going to be very costly to correct and can be loaded with many other complications. “We never have the time to do it right, but we always find the time to do it over.” The legal community fully expects a manufacturer to hold a thorough design review on a new product at its conception, as much as they would expect the manufacturer to follow known industry standards and state-of-the-art techniques in the design and engineering of the product. The design review is an industry standard for manufacturing. In a product liability lawsuit, attorneys for the plaintiff will be interested in determining whether the manufacturer appears to have been a concerned and caring company and took the time necessary to assure the product they developed was safe and reliable, or whether the manufacturer in question was more interested in rushing a product to the market and making a profit. The primary focus of the design review, separate from the product safety review, is to prevent design or manufacturing defects. Two key focus areas are that of “manufacturability” and “reliability.” Does the company have the ability to manufacture the product to the specifications and tolerances required, consistently, and will the product prove to be reliable in the field? In the Third Restatement of Torts the law Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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defines a manufacturing defect as occurring when a “product departs from its intended design even though all possible care was exercised in the preparation and marketing of the product.” Examples of a departure from a product unit’s design specification include products that are physically flawed, damaged, or incorrectly assembled. In a product liability lawsuit the plaintiff typically asserts that it is the failure to meet the design specifications that caused an injury. The Third Restatement applies this type of liability to manufacturers, as well as commercial sellers and product distributors, noting that defects may arise after manufacture while products are being shipped or in storage. “As long as the plaintiff establishes that the product was defective when it left the hands of a given seller in the distributive chain, liability will attach to that seller.” Additionally, if a manufacturer delegates some aspect of the assembly to another party, that manufacturer may still be liable under the rules of vicarious liability. Thus, while the product design may be safe, a claim for manufacturing defect may still lie when one individual unit failed to conform to that design and the deviation caused an injury. The Third Restatement has moved product liability away from negligence and towards “strict liability without fault.” Rather than focusing on the reasonableness of that manufacturer’s quality control efforts, liability is assigned based on the fact that a defect existed at all. In order to prevail, the plaintiff must demonstrate that a defect existed at the time the product left the manufacturer’s hands, and that the defect caused an injury. Notably, the Third Restatement makes no mention of any need to prove that a product is unreasonably dangerous or not reasonably safe. Overall, while the definition of a manufacturing defect has remained similar to that adopted by many courts, the imposition of strict liability represents a significant change. A common misperception about the design review is that its entire focus is on risk and hazards analysis. This is not true. The design review is a technical critique of the product, its components, and the processes required to make the product. I recommend that the overall design review be divided into two separate events and handled by two separate teams, as shown in Fig. 4.1. The overall design review focus is here to be split into two chapters. This chapter will deal with design review as it pertains to the manufacturability and reliability of the proposed product, and the prevention of manufacturing defects. Chapter 5 will deal with the focus as it pertains to product safety and hazards analysis, and the prevention of accidents and injuries. In other words there are two different types of design reviews with two different focuses handled by two different teams: the design review team and the product safety team. Almost every company for which I conduct in-house seminars or that attends my public seminars around the world will initially tell me they routinely hold design reviews on new products being developed, and will feel the concern is fairly under control. At face value it would seem there is little need to address the topic. There is typically a significant difference, however, in the scope and depth of the design review that will be identified in this chapter and that which many manufacturers are most likely conducting. Design engineers may discuss certain aspects of a new product design with various department heads or supervisors to get answers to questions that the engineer may have, or select members of the management team might participate in

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Figure 4.1 Review Team Objectives.

discussions regarding specific aesthetic or mechanical attributes, or the selection of certain components of a proposed new product, but this still does not satisfy the required objective or effectively prevent the ultimate potential of manufacturing defects, which could then lead to product liability. When you combine the requirements of this chapter and the next, it will go well beyond the normal quality and engineering programs and efforts and the content of most TQM and ISO programs. As shown in Fig. 4.1, the primary objectives of this stage in a design review are to address the following issues: † † † † † † †

Manufacturability, Product reliability, Material/component concerns, Industry standards and state of the art, User/operational concerns, Field serviceability, and Operator instructions.

Let us look at these in more detail. The following are what the members of the Design Review Team should be evaluating: 1. Manufacturability. Do we have the ability to manufacture the product to all the specifications called out on the preliminary drawings? Can we fabricate the component parts to the aesthetics, configurations, and tolerances being specified? Do we have the ability to handle the subassembly or final assembly of the product, or do special fixtures, work stations, or assembly areas need to be designed and built? Are we incorporating components or materials for which we have little or no prior experience?

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Some of these questions, such as the ability to maintain dimensional tolerances, cannot be answered unless process capability studies have been performed on the fabrication equipment that will be used. I have seen blueprints that just show the exact measurement of where a hole is suppose to be punched in a sheetmetal part, or what the exact length is suppose to be for a sheared piece of metal, with no allowable tolerances. How could that be? Nothing is perfect. In other cases I have seen where all the exact dimensions are listed on the blueprints, and there will be a tolerance specification in the title box that reads, “Unless otherwise specified, all tolerances will be plus or minus 0.020.” A capability study of the various punch presses, press brakes, or saws, might show that the manufacturer is only capable of maintaining plus or minus 0.020 on 85 percent of the parts coming off the equipment. So what happens with the other 15 percent? Scrap? Rework? Field failures? One basic problem is that many companies have never performed any capability studies of their equipment and they have no idea what they are truly capable of producing. When such engineering specifications are called out they are basically ignored. “That will be our target, and we’ll do the best we can.” Further down the line someone will be trying to make the parts fit together, and attention will only be focused on the amount rejected. But some of what was used may not have been per spec, and will fail at a later date. So “manufacturability” is a critical concern and should not be overlooked or taken for granted. 2. Product Reliability. We are not talking about “liability” but “reliability.” Is the product going to be reliable for the expected users and the intended use, and in the anticipated environment? Will the product be exposed to high heat, subzero cold, sunlight? How will it be handled? How much use is it likely to experience? We need to determine whether the product will live up to its full expectations, and most of this assurance will be gained through product testing, as opposed to looking up specifications on the materials. Products are commonly designed to perform in a reliable manner under optimum conditions, but what considerations are given to adverse or extreme conditions? How reliable will the product be when subjected to extreme climactic or other challenging elements it will likely face? It is easy to spec out component parts that are said to be rated for certain extremes, but the best practice is to test them out yourself. For instance, let us say the final product is going to be a central air conditioner for residential use, which would logically be placed outside of the home. The preliminary specification involves molding the housing out of plastic instead of forming sheetmetal. The plastic housing material concerns would include the following: –Whether it would be used in northern climates where temperatures fall below 2308F, as well as southern climates where daytime temperatures might exceed 1208F? –The fact that it would logically be exposed to constant UV radiation; –The fact that it would be exposed to high winds, rain, sleet, and snow;

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– The fact that it will need to withstand shipping, handling, and installation; – The fact that it will likely be struck by certain objects, from lawnmowers, kids, falling objects, and so on; – It might be subjected to internal heat combined with external and solar heat buildup. All of these situations and many more need to be considered on just the use of the plastic housing as we address the aspect of reliability. Remember, we are primarily trying to determine if the product, along with its component parts, is going to be reliable for the intended use, without getting into the whole aspect of potential liability. With that said, obviously if a product proves not to be reliable, it could increase the chances of incidents occurring that actually become a liability as well, but that is not the primary focus at this stage. At this point we are just trying to determine if the product will be reliable. This would also be the stage where we begin to recognize the need for some testing of various component parts or design concepts in order to validate the proposed design. 3. Material/Component Concerns. What materials and/or suppliers are we planning to use in the construction of this product? Are there any concerns regarding the material, planned components, or suppliers of the components? This could tie in with some of the same concerns under reliability, but there may be other concerns regarding materials and components, such as their availability, component characteristics, operating history of both the components as well as the suppliers of the components, and numerous other considerations based on the final product. Let us say the product is an ATM machine and the assembly is built around a specific supplier and brand of LCD screen. What would happen if in a year the screen is no longer available? Would the product then need to be redesigned with different stack-up dimensions for another brand of LCD screen? What about replacements for the field; how would that ever be handled if the new replacements did not fit in the existing product? These are examples of just some of the problems that must be addressed and ironed out up front in the design review, as opposed to just facing that predicament when and if it surfaces. 4. Industry Standards and State of the Art. Could specific industry standards apply to the product, and will we be in compliance, or are we knowingly choosing not to comply? Let us say the product is a consumer electrical appliance, and there is the choice of manufacturing it in compliance to Underwriters Laboratories (UL), or making it a basic two-wire unit that is not UL approved. If we plan to design it in compliance to an established standard, then we need to review the proposed design to ensure it is in compliance. The next question is whether the design of the product, including all the components, mechanical and operational characteristics are considered to be state of the art for the industry. If another company builds the same or very similar type of product, but uses different components or has different

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mechanical features which could be considered better and more reliable, that could ultimately pose a problem and could ultimately even come back as a liability issue. Does someone within the organization stay on top of such issues? Whether a company’s products are truly state of the art is a real common area of concern. Every company feels their products are state of the art, and that they even lead the pack, but when they actually get involved in a product liability lawsuit and their product is meticulously analyzed by outside experts, it could be found to be lacking or even archaic in design. Some of the common problems end up being that the company has been around for a long time, its engineers have been with the company a long time, the company is well known in its industry and feels it is a leader, the engineers have been with the company a long time and feel they are leaders as well, and in fact the company is producing new products the same way it would have 10 years ago, and are not state of the art by any means. Some of the common problems are that the engineers and other key personnel are not getting out to the trade shows to see and stay on top of the latest and greatest components and processes available to them. Another problem is that they are not looking at what the competition is doing. Companies should always get samples of the competitor’s products and dissect them to ensure what they are building is as good as or better than the competition. These two concerns cannot be emphasized enough. New technologies or design concepts that make products more reliable, safer, and easier to use are things that manufacturers need to stay on top of, instead of having them brought to their attention in a lawsuit. 5. User/Operational Concerns. How complicated is it going to be for the end user to actually use or operate this product? Did we design it to be user friendly? If certain parts require periodic changing, can this be easily accomplished? Can various members of the review team already foresee operational concerns that warrant the need for design changes. Here is a simple example of a user/operational issue I personally experienced years ago. One of my daughters had just gotten married, and lived in another state. My wife and I traveled to see them and were staying in their new condo for the first time. The first morning we were there I got up and headed for the guest bathroom to take a shower. After stripping down and pulling the shower curtain across the tub, I turned on the facet, adjusted the water temperature, and was then going to change the valve so the water came out the shower head instead of the facet, but there was no visible way to achieve this. No state-of-the-art T-handle to pull up, no handle or arm to swing from left to right, absolutely nothing that would close the facet and redirect water to the shower head. After what seemed like 20 minutes, I turned off the faucet, put on a bathrobe and went to find my daughter. She came in and showed me that there was a small ring at the mouth of the water facet outlet, which was the same diameter as the facet opening and only about 1/8 in. high, that you had to grab and pull down in order to redirect the water to the

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shower head. No directions, arrows, special color, markings, nothing. The condo management had to show her how it worked, and each person has to show the next. Unbelievable! How could a design engineer and manufacturer have ever created such a stupid abnormal concept. 6. Field Serviceability. How serviceable is the product? I have seen companies manufacture products that would contain florescent lamps, but if the end user ever had to replace one of the lamps, they would almost have to break the lamp in half to get it out of the unit. Of course when the manufacturer assembled the unit, and inserted the lamps at some opportune moment in the assembly process, it was a simple process. But no one attempted to take the lamps back out of the finished unit, so they were unaware of the difficulty the end user or service technician would face. I have owned central humidifying units that attached to your furnace duct, and each year the metal panel evaporator device would need to be replaced. Rather than being something that just pulls out the top, or something you can get to by simply removing a rear panel, this would require the complete removal and disassembly of the entire unit in order to replace the water panel, which would religiously launch me into an hour-long cursing event. Here too, I could never understand what the design engineers were thinking of when they came up with the concept. Manufacturing teams are often not looking at how complicated some products are to either use or service. The product functions the way it is expected to function and everything else is taken for granted. This is one area that quality and other functions need to critically analyze. One effective way to address this issue is to have someone totally removed from the technical product brought in to operate or service it, while others observe the process. 7. Operator Instructions. Here is our first opportunity to recognize and begin to address the needs regarding instructions. Keep in mind that inadequate warnings and instructions are a leading cause of product liability lawsuits.

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THE DIFFERENT STAGES OR TYPES OF DESIGN REVIEWS

A design review is not typically just one event, or even held at one specific time. There are many different evolutionary stages in the product development process where design reviews could take place, based on the type of product and industry. The following is a list of possible design reviews: 1. Introductory Design Review. This may be held when the company first becomes aware of the need, or recognizes an opportunity for a new product, and may only be dealing with an artistic image or sketched concept of a final product. The objective would be to make everyone involved familiar with the new product or concept as much in advance as possible, so they can begin to discuss the possible design and construction. This would also be the time to launch the new product introduction team. 2. Preliminary Design Review. This would be held once the preliminary engineering drawings have been completed, but prior to their release. In some situations this may be the only review held, in place of the other two (Review #1 and review #3). The objective of this review would be for the representatives of key engineering and production departments to review the proposed drawings and specifications, ensure they have the capabilities to build the product to the specs, identify areas of concern regarding quality, materials and design reliability, needed instructions and labels, standards compliance, and any other aspect that could later come back to haunt them. 3. Final Design Review. This would be held after the drawings have been released and the first sample unit(s) produced, in order to address any problems that were not recognized in the previous stage, and to make any necessary lastminute changes to the design and specifications. At this stage the team would see first hand the mechanical fit and function of the component parts, recognize fabrication and assembly issues, as well as whether the product performs to its expectations. Although production would not logically start until after this review took place, problems identified and changes proposed to components and fabricated parts may result in additional expense, being that components may already have been ordered and received and fabricated parts may already be in process. Yet it is still better to catch and address problems at this stage then after the start of production and especially after products begin shipping to the field. The official start of production would follow this review. 4. Post-Production Design Review. This would be held after the product was produced and probably shipped, but while the whole experience is still fresh in everyone’s mind. It serves as an overview of the entire product and process, and although it will not have an impact on the specific product that was just produced, it will offer opportunities for improvement on a rerun of the product. It also enables the management team to see how the actual

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manufacturing costs compared to the original estimates, and whether they are still on target with the planned profit. Sometimes manufacturing companies are more interested in just finishing the order and moving on to the next product, and do not hold this review until the product is ready to run again, which might be six months or a year or more later. The problem with that scenario is that the management team may not remember the issues anymore and may recreate them in the rerun, turning it into somewhat of a vicious cycle. Another important element that is often recognized in a post-production design review is that there may have been processing steps or stages that had to take place, and were not anticipated in the estimate or were mistakenly overlooked. Without this estimate-to-actual review of costs, such losses or oversights will not be known and the company will continue to repeat them on future reruns. Another important contribution to this review is that if it is held within a couple months of the production run, but after products were shipped to the field, there should also be input from sales and customer service on how well the product was received and performed for them. Did products arrive damaged? Did the enduser experience problems that were not anticipated? Was there a percentage of products that were defective for any reason and had to be replaced? Was there confusion with the end-users regarding the operating instructions which customer services or technical support had to address with them? A new product could be subject to all four of these reviews, or three of the reviews, or even two. The key is to ensure that one of the preliminary design reviews actually takes place and the product in question is thoroughly analyzed by the design review team from the perspectives of manufacturability, reliability, materials and component concerns, industry standards, user operational concerns, field serviceability, and operating instructions before the company begins production. This is not something that a lone engineer would effectively address.

4.2

CREATING THE DESIGN REVIEW TEAM

An important part of the design review process is the creation of the design review team. Member candidates should represent the various related departments and disciplines, without repetition. A typical roster might include product or design engineering, reliability engineering, quality, sales, or account management, key representatives from the various manufacturing departments, manufacturing engineering, and process engineering. This team could therefore consist of 8 to 10 members, each bringing to the table a specific area of expertise. A procedure should identify this composition, and more importantly, the contribution each of these members is expected to bring to the table and their responsibilities: 1. Sales or Account Management. This individual should function as the voice of the customer and ensure that the aesthetic standards, functional or performance

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2.

3.

4.

5.

6.

7.

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specifications, materials that the customer specified, or other characteristics the customer is requiring or expecting are being incorporated. Reliability Engineering. This representative should review the components and materials being considered, determine what types of special testing will need to be conducted to validate the reliability of the design, determine the types of extreme conditions the product could be subjected to, and the relative tests that need to be conducted. Manufacturing Department Representatives. These members should review all the planned materials, fabrication considerations, dimensional tolerances, coatings, finishes, and assembly requirements being specified and determine whether the department has the capability of accomplishing what is required. Manufacturing Engineering. This representative should identify all the departments, special work cells and processes that will need to be utilized, and any special processing areas or manufacturing provisions that will need to be developed or considered. It should also be determined if any special process capabilities studies will need to be conducted in order to prevent scrap and rework. Process Engineering. This member should determine all the processing steps and instructions that will need to be documented, special assembly fixtures and work stations that will need to be created, and bring to light any processing problems. Quality. (May be the party spearheading the review.) This party should determine the product and/or aesthetic standards that need to be retained, developed or requested from the customer through sales, along with any other customer specs. Reliability concerns and special tests should also be identified that may need to be conducted, as well as in-process tests that need to be set up and coordinated with process engineering, along with other process instructions. It should be researched whether there were any assembly or field problems with past products of a similar design, and it should be ensured that the current product has adequate revisions. (Document the minutes.) Product Engineering. (May be the party spearheading the review.) This representative should present and identify all aspects of the proposed product. (Document the minutes.)

It is easy for members of the management team to attend a design review and not accept any responsibility for the success or failure of a new product, leaving it the responsibility of the product or design engineer. In fact, after reviewing the proposed product, they could even walk out of the meeting and voice negative opinions regarding the design of the product that they never expressed during the course of the meeting. By clearly documenting in a procedure what the company is expecting each individual to accomplish, their role and responsibility, as well as the expectations of the whole team, this type of attitude and behavior can be avoided.

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The product or design engineer must have an open mind for the review to be successful. Too often, the design engineer takes control of the review process, or worse yet, is the sole reviewer. The engineer feels that he or she is enough of an expert to decide on the best design, or may have discussions with just a few other individuals where there may be some question. Part of this comes from the design engineer assuming ownership of the product, and sole responsibility for the product’s success. Management should not allow this to be the case. The engineer needs to place the proposed drawings in front of the team, and be open minded as the team reviews and critiques the concept and recommends possible changes/improvements from each of their perspectives. It needs to be recognized that the engineer is a jack-of-all-trades, whereas the other members of management have to be experts in their specific areas. One of the advantages for the engineer to follow this procedure is, rather than bearing the sole responsibility for the product’s success, the responsibility is now being divided amongst all the members of the team, and the engineer is just another member of the team. If the design were to ultimately fail, then the team failed, not the engineer. The design review is not intended to just be an awareness session. There might even be a form for each function to sign-off in the end, which would clearly show that they were all in agreement with producing the proposed product in the final configuration.

4.3

MAKING DESIGN REVIEWS THE POLICY

To set this first phase of the design review focus into motion the manufacturing company needs to put a basic policy in place. This should be spearheaded by the in-house expert and administrative team, which will be discussed in Chapter 12, but some sort of policy statement needs to be created and put into place to ensure all new products are properly analyzed and tested before being launched, and the need for such reviews will be out of necessity, not convenience. The CEO of the organization needs to install the directive to ensure the entire management team knows what is expected. This is a very serious subject, and all the members of the management team need to know that the President or CEO views it that way. Holding design reviews and testing products is not an elective for when time permits, but a prerequisite for every new product developed. When manufacturers are sued for product liability, attorneys for the plaintiff will try to portray the company and its management team as careless and irresponsible in the development of the product, with a primary objective of racing the product to the marketplace in order to generate sales, but the defense attorneys are going to be looking for anything they can gather to prove otherwise. Such a policy statement would not only help to put the company in a positive light, but more importantly, it would help prevent the problem that led to the lawsuit to begin with. In the CPSC “Handbook for Manufacturing Safer Consumer Products” they mention that their needs to be “Executive Action” regarding this issue. They include the Product Safety Policy (Box 4.1) and the Product Reliability Policy Statement (Box 4.2).

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BOX 4.1

PRODUCT SAFETY POLICY

The commitment of the manufacturer is the first executive step to be taken in developing an industrial consumer product safety system. A clear, strong statement from senior management citing statutory and voluntary reasons for this commitment is needed. The policy should be explicit with respect to the primacy of product safety during design, production, and distribution. This policy should also make clear that it applies not only to the internal operations but also to suppliers, including suppliers of products manufactured outside the United States. Ordinarily such a statement is publicized widely within the organization as a platform for subsequent planning and action. It may also be widely publicized outside the organization. The Product Reliability Policy Statement (Box 4.2) does not need to be the one actually used, but serves as an example of what may be written in order to make it absolutely clear what top management expects, and keep the team on the right track. The actual Policy Statement could just be one paragraph that states design reviews are mandatory. This one, however, is more descriptive and addresses more issues. Whatever policy statement is written, ultimately it needs to be incorporated into the company’s Quality Assurance Manual, possibly heading a section that addresses New Product Development, and the other related procedures developed would follow the Policy Statement.

BOX 4.2

PRODUCT RELIABILITY POLICY STATEMENT

(Company) is committed to ensuring that the products we design, engineer, and manufacture will be safe and reliable for our customers and the end user in the application that the product was intended. This policy statement is issued as part of our overall Quality Program and the objective will be accomplished through the following means: †

†

†

All newly designed and manufactured products will be reviewed by the Product Safety & Reliability Review Board to ensure that they are safe and reliable and will function as required in their intended application. All newly designed products will be reviewed to ensure that we as a manufacturer, or any outside subcontractor we select, have the ability and provisions in place to produce the product in a consistent manner. We will ensure that all new products, components, materials and processes, receive the necessary testing, prior to their use in production.

4.4

†

†

†

DEVELOPING THE DESIGN REVIEW PROCEDURE

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We will concentrate our design and engineering process on “designing out” potential risks and hazards, and make adequate provision for warnings and instructions concerning any other “residual” hazards, as well as to warn against any “reasonably foreseeable” misuse of the product. We will ensure through routine testing and inspection during the course of manufacturing that the products being produced conform to the standards, specifications, and performance factors that apply. We will maintain records that prove that the above safeguards were properly addressed, and retain these records for a reasonable period.

The policy statement will serve as our guideline in ensuring safety and reliability in the products we manufacture, and will be incorporated into the appropriate procedures of our Quality system. Compliance to these statements and guidelines will be the responsibility of every employee of our organization. Assistance in the interpretation and application of these policy statements and guidelines will be given by the Product Safety & Reliability Review Board.

___________________________ Chairman

4.4

_______________________________ President

DEVELOPING THE DESIGN REVIEW PROCEDURE

Once management fully understands the focus of the design review and has decided on the membership and some of the responsibilities, procedures need to be developed. The procedure that follows (Box 4.3) is an example of what could be written. A policy statement and purpose have been written along with the scope for when a design review would be required. The different types of design reviews are noted, but would be something that would need to be considered based on the type of industry involved. Both of the teams are identified, the design review team, which this chapter deals with, as well as the product safety team, which Chapter 5 will identify. The process portion of the procedure is written in “play script” fashion, which basically follows a flow chart concept. Each step of the process is described, along with identifying who is responsible for the individual step. In my procedures I only try to list one auditable action for each step, and again it follows a flow chart concept, so each step should tie into the next. The process steps listed are rather basic for the sake of this example, but could involve a lot more steps than shown, and naturally could have different parties listed as being responsible for each step.

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BOX 4.3

DESIGN REVIEW PROCEDURE

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MINUTES OF THE DESIGN REVIEW

When design reviews are held, there has to be a set of minutes that describes what was discussed and decided. First and foremost this serves as a reference document for the management team so they can remember what was ultimately decided on regarding various concerns and issues, several months later when the product finally hits the assembly line. A company cannot hope to have this committed to memory, nor should it be controlled by any one given person. The discussions should be well documented and maintained for ongoing reference. Every corporation will initially tell me they religiously hold design reviews, but then when I ask to see the design review minutes for the last five products introduced, things begin to fall apart. In many cases they will explain that the engineers and various managers definitely discussed various aspects of the new product designs, but they do not actually have “minutes” to show for their discussions or how they arrived at final decisions. Could these design review minutes ultimately become “dangerous documents?” They could if during litigation and discovery say three to five years later a set of minutes surfaced where potential design problems were discussed, and there were no follow-up minutes that identified what was decided. Basically, there is not a problem with almost any concern or issue being written into the design review minutes, provided there is a documented resolution either in the same set of minutes, or a consecutive set of minutes. What becomes a problem is where a design concern is expressed and documented, and there is no reference on how the issue was addressed or resolved, even though the management team could have had further discussions and come to some decision. Five years later it could imply that the management team recognized a potential design problem, and failed to do anything about it. Under cross-examination three to five years after a product was developed, it would be hard for anyone to testify as to why certain changes/decisions were made, and what the logic was to support such decisions. So it becomes imperative for the reviews and decisions to be well documented.

4.6

POLICIES AND PROCEDURES—ASSETS AND LIABILITIES

Having design review, product safety, and reliability policies and procedures in place is a very positive move for a manufacturer, not only in making every effort to ensure that management stays on the right track, but also as defensive evidence of top management’s true commitments. On the flip side, such policies and procedures can also become a liability to the company. Management teams are forever under production and scheduling pressure, which creates a constant incentive to cut corners for the sake of expediting production. We tend to look for reasons as to why a design review is not really necessary for some upcoming product: its similarities to something else already produced, critical timelines, customer demands, and numerous other excuses making the development of this product different and an exception to the rule. After a while, almost no new product receives a design review because of this practice of ongoing exceptions.

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However, the policies and procedures in place then become a liability. The President signs a Product Reliability Policy Statement, design review procedures are put into place, the company launches a new product that never went through any formal review, the product malfunctions and a customer is severely injured, the company is sued, plaintiff attorneys go through discovery and find the policies and procedures, defense attorneys are smiling from ear to ear, then it becomes known that the company did not follow its own policies and procedures, the plaintiff proves wanton, reckless, negligent actions, the company loses the case, and the court awards punitive damages on top of everything else.

4.7

ENGINEERING CHANGE CONTROL

As important as initial design reviews are, equally as important is controlling product design changes afterward. With all the concerted effort that can go into ensuring the initial design will be manufacturable, reliable, serviceable and in compliance with any standards that might pertain, the effort can be immediately cancelled out when it comes to engineering changes. Products in production can suddenly be found not to be in compliance with a required standard, a customer specification, or some critical aspect regarding reliability, all due to an ill-conceived, uncommunicated, and unapproved design, material, or component change that took place during, or just prior to, production. Someone in manufacturing could propose what would be a simple change due to various reasons, or purchasing could substitute one component or material for another because of availability, and engineering could allow for the change without giving it much thought, outside of being sure the product will still perform the same original function. But the uncommmunicated change could create significant problems in several other camps that were oblivious to the change taking place, which could include long-range reliability or even the fact that the product may no longer comply with required standards. To help prevent such possibilities it is essential to have good change control procedures in place, along with an effective change control form. The example shown in Fig. 4.2 is a brief and simplistic “change request form” which hits on a few key elements. To begin with it is an engineering change request form as opposed to an engineering change notice form, which serves as a request to make the specific change, as opposed to implying that the change was already made and the form is only a notification of the change. Secondly, it identifies the “reason for the change,” which allows for the ability to track engineering errors and initiate efforts to determine causes. If the design review team was effective in their analysis, then why would engineering errors be surfacing later? From a positive perspective, another reason for a change request could be “process improvements,” which is something the management team should never want to discourage. Another very important section of the form is the “approved by” portion. Once the Corp PL Team decides which parties or departments need to sign off on any proposed change based on their specific areas of interest, this feature will significantly reduce or eliminate the

4.8

TRACEABILITY AND RECALL PREPAREDNESS

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Figure 4.2 Engineering change request.

possibilities of having design changes take place that should not, but the form has to be guarded by policy. Exceptions should not be allowed, nor should any one party, regardless of their role or rank, be allowed to solely approve proposed changes. Again, this is a simplistic example and could contain a lot more information, including affected drawings, Bill of Material (BOMs), sections that describe why the change was not approved, or the date when the change was made effective, and several other elements or sections based on need.

4.8

TRACEABILITY AND RECALL PREPAREDNESS

Another element the design review team, or new product introduction team, should give sufficient thought to at this initial stage of product development is how they would ever recall the product if such an event was ever deemed necessary in the future. What provisions are they putting in place for unit or component part traceability, isolation, and recall, if a percentage of the population were found to contain a manufacturing defect or defective components? Although the ultimate objective in all of this is to prevent the possibilities of recall or product liability, it is also intended to place the manufacturer in the best possible position should such a disaster occur.

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4.9 MEASURING THE EFFECTIVENESS OF THE DESIGN REVIEW TEAM It is critical for companies to make every effort to ensure their new products are well thought out and launched efficiently, and the executive group should be monitoring how effective their design review teams or new product introduction teams are in their comprehensive efforts to get it right the first time. There are a number of ways to monitor these efforts, including the volume of start-up issues, actual manufacturing costs versus estimates, failures and rework expenses, and warranty costs. And those figures are what many companies will use, especially sales versus costs and warranty costs. On the simplified engineering change request form I have also included the checkboxes, which include engineering errors. Management should be interested in tracking the number of changes being submitted due to engineering errors. Why are there engineering errors? Why are the products making it out to the manufacturing floor without being caught by the team that was supposed to represent every area of concern, assuring the final product specs were accurate and do-able? The management team could track the nature of engineering changes for a specific product, or they could track the nature of all changes being submitted in order to determine how effective their overall engineering efforts are, and whether the trend regarding errors is showing improvement. There have been corporations that have tracked when engineering change requests were submitted during any given products lifecycle, such as whether the majority of changes were submitted, during the initial design review stage, during the prototype or material procurement stage, or just after the production start date. And there are other corporations that track the nature of all changes being submitted in order to track the number or percentage that were submitted because there was an error in the initial specifications, with a goal of continuously reducing engineering errors.

4.10 IN CONCLUSION Companies need to ensure they hold formal design reviews on new products developed, and that these reviews are well documented for internal reference, as well as to prove such responsible efforts really took place in the event of any possible future litigation. We live in a very litigious world, and a company simply cannot afford to rush new products into the marketplace without a thorough critiquing of every technical concern.

5 New Product Introduction: Product Safety Reviews Hazards Analysis, and Risk Assessment When products fail the ultimate reliability test, consumer use and abuse, and end up being the subject of a product liability lawsuit, it is not just the product that ends up being scrutinized, but also the manufacturer’s internal programs and efforts to ensure that the product would have been safe and reliable in the first place. Does the manufacturer have a product safety review team? Did they meet and review the product in question? Was there a design review meeting? Were the needed safeguards incorporated into the product that should have been there? Were the necessary warnings and instructions provided with the product that adequately identified and stressed the seriousness of potential hazards? Were these warning labels presented in such a conspicuous manner that the end-user would immediately see them? All of these considerations and many more will be analyzed by the attorney for the plaintiff, who will try to prove the manufacturer negligent in the design and presentation of the product. The manufacturer has to be in a position to prove that they acted in a responsible manner, and that all such considerations in product design were properly addressed. In the 3rd Restatement of Torts Section 2, subdivision (b) defines the test for determining whether a product is defectively designed. In the pertinent part, this section Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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states the following: “A product is defective in design when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design . . . and the omission of the alternative design renders the product not reasonably safe.”

5.1

CREATING THE PRODUCT SAFETY TEAM

In the previous design review, Chapter I mentioned that the design review team could consist of eight to ten members, representing the different areas of the operation that would have a role in the development of the product as well as a vested interest in the success of the product. As the design review team may consist of eight to ten members, the product safety team would only consist of around three well trained members. The question would logically be asked as to why the design review team could not perform the product safety review at the same time they are performing a design review. It needs to be recognized that a good product safety review, hazards analysis, and risk assessment is a very time-consuming project for a skilled and well trained group of analyzers, which could take four to eight hours for the simplest of products. Having eight to ten individuals with little to no specific training and experience take part in such an exercise could lead to the team spending days analyzing the product, and especially dealing with suggestions that might lack credibility, but now that they are being mentioned, time will have to be spent on properly ruling them out. The design review team will have their hands full just trying to determine manufacturability, reliability, usability, and serviceability, much less trying to determine all the potential hazards and how best to address them. The product safety team might consist of individuals from quality, reliability, testing, safety, engineering, compliance, or other departments/individuals, based on the company itself and its structure. The review by this team should be under the direction of a senior executive of the company. After the selection of the product safety team members, they then need to receive the necessary training on the tools for performing a hazards analysis/risk assessment. There is also a value in maintaining a specific team as opposed to the responsibility continuously being passed around to different players. Part of what will make the team more successful will be the ongoing experience of such reviews together with the historic field results. What problems did the company face in the field with similar products? In many situations companies are not performing any product safety/hazards analysis evaluations on their products, and end up being exposed to trouble. Other companies may state that they routinely review each new product (in fact a customer may require that they perform a failure mode and effects analysis, FMEA), so the Engineer of record performs an FMEA analysis of sorts. In many cases an FMEA does not satisfy the product safety and liability prevention objective. The primary focus of the FMEA is to determine what could possibly fail on the product, and what would have been the possible cause of that failure, as opposed to how someone could be injured by the product, or how the product could ultimately be

5.2 ELEMENTS OF THE HAZARDS ANALYSIS

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the cause of property damage. Another problem with the typical FMEA analysis is that the product’s own design engineer is performing the analysis, so it becomes a biased perspective. Having an independent product safety team review the product would allow for the company’s best interests to be represented, regardless of the outcome or final recommendations. It should also be mentioned that in a special study performed by two faculty members of the University of Michigan of 400 registered engineers, 80 percent never received any product safety training in college, and 70 percent never attended a product safety seminar or received any outside training on how to perform a hazards analysis/risk assessment. So the question then becomes, who within a company even knows what they are doing in this area?

5.2

ELEMENTS OF THE HAZARDS ANALYSIS

Because of the wide array of products that exist (consumer products, commercial, industrial, medical, and so on) it becomes difficult to put together a sample template of questions and focus points that a product safety team could work from. Looking beyond the questions and analysis that would pertain to any product specifically, the following represents a random list of questions that might prove beneficial to the product safety team when evaluating a product from the Product Liability Prevention (PLP) perspective: 1. Is the product in compliance with all regulatory safety standards that pertain? 2. Who are all the individuals that might come in contact with the product (operators, bystanders, installers, service personnel, maintenance personnel, sales reps, distributors, retail sales personnel, supervisors, setup personnel, adults, children, infants, and so on)? 3. What potential hazards could an unintended bystander or untrained operator face that would not be immediately apparent to them (for example, an operator trainee versus a skilled operator, two-year-old children playing with a toy or game intended for six- to eight-year-olds)? 4. Are the potential hazards being properly addressed and\or identified? 5. What might the end-user do with this product that would be considered “reasonably foreseeable misuse”? 6. Are the necessary safeguards or safety devices incorporated into the design? 7. What kind of warning labels or instructions are planned to be included with the product? 8. What similarities does this product have with others the company previously manufactured that may have historically had problems in the field? 9. How does the product and its safety features compare to anything marketed by the competition (if any), which could then be viewed as state of the art? Of course, based on the nature of the product, there could be a substantial checklist of questions the team would need to ask itself that could involve trying to identify all

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types of hazards, including cutting/severing, crushing, pinch-points, drawing-in hazards, unexpected starts, overhead bumping hazards, magnetic attraction, instability, impact, splinters, projectiles, amputation, electric shock, choking, strangulation, aspiration, and countless others. These questions, along with any others found to be pertinent, need to be addressed by the group, and the concerns expressed along with the action plans taken need to be fully documented. You must be in a factual position to prove to the courts that you made every reasonable effort to ensure that this was a safe and reliable product. And you must address these concerns not just as they may pertain to the intended user, but also the potential unintended user. This is a new perspective in product reliability analysis. Although some of the areas of concern may have been asked or considered by departments to a degree, it would not have been with the same focus and intensity that is now being applied. Nor would it have been from the same level of awareness and expertise. This is not to imply that the manufacturer is expected to ensure total safety at any cost, but instead to ensure that the manufacturer made responsible decisions that provided reasonable product safety in balance with cost and utility. Industry standards along with state-of-the-art techniques are good starting levels of what would be expected, although it has to be recognized that they are also criticized by plaintiff attorneys as being minimal. Products that are unique in nature require even more in-depth analysis, because they will logically lack history or industry precedents. Reliability tests on prototypes may uncover areas of concern that may not have been obvious in the initial concept review, but make themselves visible after product wear or aging.

5.3 DESIGN REVIEW—A VIEWPOINT OF THE CONSUMER PRODUCT SAFETY COMMISSION (CPSC) Design review is an examination of materials, configuration, packaging, and labeling to enable identification of potential product hazards. The design review consists of the following: 1. Identification and evaluation of potential safety hazards against pre-established criteria appropriate to the product. It is particularly important that these criteria include objective projections of the conditions under which the product is used, including recognition of the age levels and physical limitations of users, and contingencies that might occur as a result of reasonably foreseeable misuse or abuse of the product. It is advisable that the criteria distinguish substantial safety hazards from product deficiencies that do not involve risks of injury or impairment of health. 2. A review of these evaluations by a group chaired by a designated senior official. This group should represent the areas of design, production, quality control, and consumer service.

5.4

FAILURE MODE AND EFFECTS ANALYSIS (FMEA)

139

Appropriate corrective action must be taken when product safety hazards are identified. Adequate records must be maintained showing the details of the hazard and subsequent corrective actions taken. 5.4

FAILURE MODE AND EFFECTS ANALYSIS (FMEA)

FMEA (Fig. 5.1) is a procedure for analysis of potential failure modes within a system for the classification by severity or determination of the failure’s effect upon the system. It is widely used in the manufacturing industries in various phases of the product lifecycle. Failure causes are any errors or defects in process, design, or item, especially ones that affect the customer, and can be potential or actual. Effects analysis refers to studying the consequences of those failures. In FMEA, failures are prioritized according to how serious their consequences are, how frequently they occur, and how easily they can be detected. An FMEA also documents current knowledge and actions about the risks of failures, for use in continuous improvement. FMEA is used during the design stage with an aim to avoid future failures. Later it is used for process control, before and during ongoing operation of the process. Ideally, FMEA begins during the earliest conceptual stages of design and continues throughout the life of the product or service. The purpose of the FMEA is to take actions to eliminate or reduce failures, starting with the highest-priority ones. It may be used to evaluate risk management priorities for mitigating known threat vulnerabilities. FMEA helps select remedial actions that reduce cumulative impacts of lifecycle consequences (risks) from a systems failure (fault). The terms used in an FMEA include the following: Failure Mode: he manner by which a failure is observed; it generally describes the way the failure occurs. Failure Effect: The immediate consequences a failure has on the operation, function or functionality, or status of some item. Local Effect: The failure effect as it applies to the item under analysis. Next Higher Level Effect: The failure effect as it applies at the next higher indenture level. End Effect: The failure effect at the highest indenture level or total system. Failure Cause: Defects in design, process, quality, or part application, which are the underlying cause of the failure or that initiate a process that leads to failure. Severity: The consequences of a failure mode. Severity considers the worst potential consequence of a failure, determined by the degree of injury, property damage, or system damage that could ultimately occur. Indenture Levels: An identifier for item complexity. Complexity increases as the levels get closer to one.

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Figure 5.1 The FMEA process.

An FMEA simple scheme would be to have three indices each ranging from 1 (lowest risk) to 10 (highest risk). The overall risk of each failure would then be called the risk priority number (RPN) and is the product of severity (S), occurrence (O), and detection (D) RPN ¼ S  O  D where a detection of 1 means the control is absolutely certain to detect the problem and 10 means the control is certain not to detect the problem (or no control exists). The RPN (ranging from one to 1000) is used to prioritize all potential failures to

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141

decide upon actions leading to reducing the risk, usually by reducing the likelihood of occurrence and improving controls for detecting the failure. 5.4.1

Step 1: Severity

Determine all failure modes based on the functional requirements and their effects. Examples of failure modes are electrically shorting, overheating, breaking, and malfunction. A failure effect is defined as the result of a failure mode on the function of the system as perceived by the user. In this way it is convenient to write these effects down in terms of what the user might see or experience. Examples of failure effects are degraded preformance, property damage, and possible injury to a user. Each effect is given a severity number (S) from 1 (no danger) to 10 (important). These numbers help an engineer to prioritize. If the severity of an effect is closer to 10, actions should be to design out the condition and, if possible, to eliminate the failure mode. 5.4.2

Step 2: Occurrence

In this step it is necessary to look at the cause of a failure and how likely it is to occur. This can be done by looking at similar products or processes and the failures that have been documented for them. A failure mode is given a probability number (O), again ranging from one to ten. The higher the number, the more critical the situation. 5.4.3

Step 3: Detection

When appropriate actions are determined, it is necessary to test their efficiency. Also a design verification is needed. First, the product safety team should look at the current controls of the system that prevent failure modes from occurring or which detect the failure before it reaches the customer. Each combination from the previous two steps is given a detection number (D). This number represents the ability of planned tests and inspections to remove defects or detect failure modes. After these three basic steps, RPNs are calculated. 5.4.4

Risk Priority Numbers

RPNs do not play an important part in the choice of an action against failure modes. They are more threshold values in the evaluation of these actions. After ranking the severity, occurrence, and detectability the RPN can be easily calculated by multiplying these three numbers: RPN ¼ S  O  D. This has to be done for the entire process and/or design. Once this is done it is easy to determine the areas of greatest concern. The failure modes that have the highest RPN should be given the highest priority for corrective action. After these values are allocated, recommended actions with targets, responsibility, and dates of implementation are noted. These actions can include specific inspection, testing or quality procedures, redesign (such as selection of new components), adding more redundancy and limiting environmental stresses or operating range. Once the actions have been implemented in the design/process, the new RPN should be

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checked to confirm the improvements. These tests are often put in graphs, for easy visualization. Whenever a design or a process changes, an FMEA should be updated. A few logical but important thoughts come to mind: 1. Try to eliminate the failure mode (some failures are more preventable than others). 2. Minimize the severity of the failure. 3. Reduce the occurrence of the failure mode. 4. Improve the detection. This is basically how an FMEA works. The concern is that the focus tends to be largely on the function of the product, as opposed to things like foreseeable misuse considerations and others. 5.5

CAUSE-AND-EFFECT DIAGRAM

The “Ishikawa diagram” (“fishbone diagram” or “cause-and-effect diagram”) is the brainchild of Kaoru Ishikawa, who pioneered quality management processes in the Kawasaki shipyards, and in the process became one of the founding fathers of modern management. It is simply a diagram (Fig. 5.2) that shows the causes of a certain event. It was first used in the 1960s and is considered one of the seven basic tools of quality management, along with the histogram, Pareto chart, check sheet, control chart, flowchart, and scatter diagram. It is known as a fishbone diagram because of its shape, similar to the side view of a fish skeleton. Causes in the diagram are often based around a certain category or set of causes, such as the 6 Ms, 8 Ps or 4 Ss described below. Cause-and-effect diagrams can reveal key relationships among various variables, and the possible causes provide additional insight into process behavior.

Figure 5.2 The Cause-and-Effect diagram (Ishikawa diagram or Fishbone diagram).

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MIL-STD 882

143

Causes in a typical diagram are normally arranged into categories, the main ones of which are the following: †

†

†

The 6 Ms: Machine, method, materials, measurement, man, and mother nature (environment) (recommended for the manufacturing industry). Note: a more modern selection of categories used in manufacturing includes equipment, process, people, materials, environment, and management. The 8 Ps: Price, promotion, people, processes, place/plant, policies, procedures, and product (or service) (recommended for administration and service industries). The 4 Ss: Surroundings, suppliers, systems, and skills (recommended for the service industry).

It can also be used in connection with the Neuro-linguistic programming model of the Neurological Levels created by Robert Dilts: with identity, beliefs and values, capability, behavior, and environment. A common use of the Ishikawa diagram is in product design, to identify desirable factors leading to an overall effect. Mazda Motors famously used an Ishikawa diagram in the development of the Miata sports car, where the required result was “Jinba Ittai” or “Horse and Rider as One.” The main causes included such aspects as “touch” and “braking” with the lesser causes including highly granular factors such as “50/50 weight distribution” and “able to rest elbow on top of driver’s door.” Every factor identified in the diagram was included in the final design. Most Ishikawa diagrams have a box at the right-hand side in which is written the effect that is to be examined. The main body of the diagram is a horizontal line from which stems the general causes, represented as bones. These are drawn towards the left-hand side of the paper and are each labeled with the causes to be investigated, often brainstormed beforehand and based on the major causes listed above. Off each of the larger bones there may be smaller bones highlighting more specific aspects of a certain cause, and sometimes there may be a third level of bones or more. These can be found using the “5 Whys” technique. When the most probable causes have been identified, they are written in the box along with the original effect. The more populated bones generally outline more influential factors, with the opposite applying to bones with fewer branches. 5.6

MIL-STD 882

This standard was primarily set up for the departments and agencies within the Department of Defense (DoD), but could be used as a tool for any manufacturer, with the exception of the final acceptance criteria. A key objective of the DoD system safety approach is to include mishap risk management consistent with mission requirements, in technology development by design for DoD systems, subsystems, equipment, facilities, and their interfaces and operation. The DoD goal is zero mishaps. This standard practice addresses an approach (a standard practice

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normally identified as system safety) useful in the management of environmental, safety, and health mishap risks encountered in the development, test, production, use, and disposal of DoD systems, subsystems, equipment, and facilities. When properly applied, these requirements should ensure the identification and understanding of all known hazards and their associated risks, and mishap risk should be eliminated or reduced to acceptable levels. The objective of system safety is to achieve acceptable mishap risk through a systematic approach of hazard analysis, risk assessment, and risk management. The key to developing most mishap risk assessment tools is the characterization of mishap risks by mishap severity and mishap probability. As the highest system safety design order of precedence is to eliminate hazards by design, a mishap risk assessment procedure considering only mishap severity will generally suffice during the early design phase to minimize the system’s mishap risks (e.g., just do not use hazardous or toxic material in the design). When all hazards cannot be eliminated during the early design phase, a mishap risk assessment procedure based upon the mishap probability as well as the mishap severity provides a resultant mishap risk assessment. The assessment is used to establish priorities for corrective action, resolution of identified hazards, and notification to management of the mishap risks. The information provided here is a suggested tool and a set of definitions that can be used. Program managers can develop tools and definitions appropriate to their individual programs. 5.6.1

Identification of Hazards

Hazards are identified through a systematic hazard analysis process encompassing detailed analysis of system hardware and software, the environment (in which the system will exist), and the intended use or application. Consider and use historical hazard and mishap data, including lessons learned from other systems. Identification of hazards is a responsibility of all program members. During hazard identification, consider hazards that could occur over the system lifecycle. 5.6.2

Assessment of Mishap Risk

Assess the severity and probability of the mishap risk associated with each identified hazard; that is, determine the potential negative impact of the hazard on personnel, facilities, equipment, operations, the public, and the environment, as well as on the system itself. Tables and definitions are shown on p. 146. 5.6.3

Identification of Mishap Risk Mitigation Measures

It is necessary to identify potential mishap risk mitigation alternatives and the expected effectiveness of each alternative or method. Mishap risk mitigation is an iterative process that culminates when the residual mishap risk has been reduced to

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a level acceptable to the appropriate authority. The system safety design order of precedence for mitigating identified hazards is as follows: 1. Eliminate Hazards Through Design Selection. If unable to eliminate an identified hazard, reduce the associated mishap risk to an acceptable level through design selection. 2. Incorporate Safety Devices. If unable to eliminate the hazard through design selection, reduce the mishap risk to an acceptable level using protective safety features or devices. 3. Provide Warning Devices. If safety devices do not adequately lower the mishap risk of the hazard, include a detection and warning system to alert personnel to the particular hazard. 4. Develop Procedures and Training. Where it is impractical to eliminate hazards through design selection or to reduce the associated risk to an acceptable level with safety and warning devices, incorporate special procedures and training. Procedures may include the use of personal protective equipment. For hazards assigned catastrophic or critical mishap severity categories, avoid using warning, caution, or other written advisory as the only risk reduction method.

5.6.4

Reduction of Mishap Risk to an Acceptable Level

Mishap risk should be reduced through a mitigation approach mutually agreed by both the developer and the program manager. Communicate residual mishap risk and hazards to the associated test effort for verification.

5.6.5

Verification of Mishap Risk Reduction

Mishap risk reduction and mitigation should be verified through appropriate analysis, testing, or inspection. Document the determined residual mishap risk. Report all new hazards identified during testing to the program manager and the developer.

5.6.6 Review of Hazards and Acceptance of Residual Mishap Risk by the Appropriate Authority The program manager should be notified of identified hazards and residual mishap risk. Unless otherwise specified, Section 5.6.8 should be used to rank residual risk. The program manager shall ensure that remaining hazards and residual mishap risk are reviewed and accepted by the appropriate risk acceptance authority. The appropriate risk acceptance authority will include the system user in the mishap risk review. The appropriate risk acceptance authority shall formally acknowledge and document acceptance of hazards and residual mishap risk.

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5.6.7 Tracking of Hazards, their Closures, and Residual Mishap Risk Hazards should be tracked, together with their closure actions, and the residual mishap risk. A tracking system should be maintained that includes hazards, their closure actions, and residual mishap risk throughout the system life cycle. The program manager should keep the system user advised of the hazards and residual mishap risk.

5.6.8

Definitions of Probability

Frequent: Likely to occur often in the life of an item, with a probability of occurrence greater than 1021 in that life. Probable: Will occur several times in the life of an item, with a probability of occurrence less than 1021 but greater than 1022 in that life. Occasional: Likely to occur at some time in the life of an item, with a probability of occurrence less than 1022 but greater than 1023 in that life. Remote: Unlikely but possibly will occur in the life of an item, with a probability of occurrence less than 1023 but greater than 1026 in that life. Improbable: So unlikely that it can be assumed that occurrence may not be experienced, with a probability of occurrence less than 1026 in that life. The military standard 882 classification guidelines chart the risks within the classifications in Fig. 5.3. If the hazard falls within Class 1 (20 – 24 on the chart) the hazard is deemed unacceptable and must be eliminated or controlled in order to reduce the risk to an acceptable level. If the hazard falls within Class 2 (12 – 19 on the chart) the hazard is deemed undesirable and must be eliminated, controlled, or approved by the appropriate people. If the hazard falls within Class 3 (8 – 11 on the chart) the hazard is deemed acceptable and, as long as the Director of Product Safety agrees, there is no need to reduce the risk. If the hazard falls within Class 4 (1 – 7) the hazard is deemed acceptable and no action is required. As stated in the beginning, the above guidelines are set up for those that are suppliers of military products to the government, and should not be misinterpreted as

TABLE 5.1 Mishap Severity Categories Description

Category

Mishap Definition

Catastrophic Critical Marginal Minor

I II III IV

Death or system loss Severe injury or major system damage Minor injury or minor system damage Less than minor injury or minor system damage

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Figure 5.3 The military standard 882 classification guidelines.

guidelines for consumer and commercial products. For those situations there are no guidelines for what is considered acceptable and companies would have to make their own decisions as to where to draw the line and be ready to defend it.

Figure 5.4 Sample frame of DesignSafe.com software. (See color insert.)

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NEW PRODUCT INTRODUCTION: PRODUCT SAFETY REVIEWS HAZARDS ANALYSIS

HAZARDS ANALYSIS SOFTWARE

In addition to those commonly used tools for failure modes analysis, there are software programs that can also be of significant help to the product safety team that help walk them through various hazard analysis checklists along with doing risk assessments. One such software program is Design Safe which is displayed in Fig. 5.4. Personally I have more confidence in the use of such software or having the product safety team just having a brainstorming session with a custom checklist to review potential hazardous conditions, than focusing on the common FMEA or root cause analysis tools. I feel they are more effective when the focus is on long term reliability and determining what would break down on a product, as opposed to identifying potential hazards, recognizing foreseeable misuse and abuse, and preventing injuries.

6 Product Testing

In most product liability cases there will be an expectation by the courts that the manufacturer tested and validated the product design before placing the product in the marketplace. This means not only testing to ensure reliable performance for the product’s expected use, but going beyond that and including the aspect of “foreseeable misuse,” which is a perspective that will be new to most manufacturers and an important element of the “Product Liability Prevention” focus. This question of whether the manufacturer ever tested the product will typically first surface during the interrogatory stage of a lawsuit, and depending on the relevance and outcome, could become a major point in the trial itself. As it would relate to the nature of the case and allegation, attorneys for the plaintiff will ask the question as to whether the product was ever tested during the development stage, and if the manufacturer answers to the affirmative, the attorneys will then request copies of the test report(s). Any time a product is alleged to have malfunctioned in some catastrophic fashion, thereby leading to property damage or personal injury, a question will surface as to whether the manufacturer had prior knowledge of the possibility, or should have known. If a product overheated and allegedly started a fire, was the manufacturer aware of the fact that the product could overheat and actually start a fire? An enduser sits or stands on a product as intended, but the product breaks because of the individual’s excess weight which leads to personal injury. Did the manufacturer know there was a weight limit that the product could withstand, or should the manufacturer have known?

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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PRODUCT TESTING

If the manufacturer tested the product and was fully aware of the potential possibilities, that prior knowledge can become a serious problem for the manufacturer if it was not addressed in some positive fashion. If the manufacturer never tested the product, and therefore was unaware of the potential problem, that too can become a major problem for the manufacturer as the court may rule that the manufacturer had a responsibility to test the product. In an effort to help prevent the possibilities of product liability it is always recommended that manufacturers fully test their products in order to prove out the design.

6.1

THE INITIAL DESIGN PROCESS

Design engineers will be instrumental in the structural design of a product, recommending which materials should be used, which components would be best rated for the application, the dimensional tolerances and specifications that need to be adhered to, and will develop the blueprints for the initial product design. Much of the material consideration will be based on available component data and material ratings furnished by the suppliers: “This is what the part or material is rated for, so it should work in this specific application.” Some of the problems that surface later could include that the part or material was not capable of living up to such an expectation and may have been overrated, or that the final application had unique features or characteristics or a combined effect that was less than ideal and ultimately had a negative affect on the material or components and caused them not to live up to their full expectations. The reliability of the final design does not solely reside in the proper selection of the individual components, nor their method of arrangement, but in the final ensemble. How the final assembled product will perform in all that it will face will prove reliability. To guarantee such an outcome one must test the product.

6.2

CONDUCTING PRODUCT TESTS

There are naturally a vast array of products, and the facilities and equipment necessary for testing them can be as vast as the products themselves. Some products are simplistic in nature and the equipment or provisions necessary for testing them might be simple as well, whereas other products are far more complex and could require a wide range of testing equipment and facilities to ultimately prove their reliability. Many manufacturers may not have the equipment and facilities necessary to thoroughly test their newly developed products, and will have to rely on outside testing laboratories for such tests. This can be expensive, and because of the costs such tests might be performed sparingly by manufacturers. Another factor that can become an issue in outside lab testing is that the hired lab will perform the specific test requested, and that is all. It would not serve as an analysis of the design concept followed by a series of validation tests, just the execution of specific tests requested. This would be the difference between sending a product to a

6.3

BUILDING A TESTING LAB

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lab to be tested and having a design analysis consulting company evaluate the proposed design. A design analysis company will consider the intended market, the environment the product will be placed in, and numerous other considerations, and will test and evaluate the reliability of the product design accordingly. They will then come back to the manufacturer with proposals on design improvements and in essence help the manufacturer design a better product. Such an analysis can be very beneficial to the designer and manufacturer, because quite typically the design analysis company should have a great deal of expertise in such evaluations. Of course, such an analysis will typically cost considerably more than a specific lab test. When a manufacturer uses a basic test lab to prove performance and reliability, then the manufacturer must have the knowledge and expertise to know what is necessary. Such tests might involve subjecting the product to extreme temperatures, structural or metallurgical stress tests, electrical monitoring, impact tests, climatic testing, and numerous other test features and parameters as specifically called out by the manufacturer, or required by a safety approval agency. Then there are those manufacturers who do not have the facilities and capability of performing reliability tests on products, but also do not want to absorb the expense of having the product tested on the outside. So these companies will fully depend on their engineering team to make the right decisions, and those decisions will be largely based on the rated performance of the selected materials and components, along with the design engineer’s own product knowledge and experience. Relying on such experience can result in problems, because a product may not always perform as it was supposed to, and the manufacturer would not find that fact out until afterwards. As impossible as it might first seem, one thing every manufacturer should consider is developing their own product reliability test center.

6.3

BUILDING A TESTING LAB

In my earlier years in Quality with a manufacturing company that was more of a job shop and built electrical display products involving fabricated metal, plastic, and typically off-the-shelf electrical components, I was routinely faced with field situations where some element of the product failed out in the field. This was from a perspective that the failures led to product liability, but that they led to rework, recalls, replacements, or upset customers. On any given day throughout the corporation and at a number of manufacturing plants we would have a large number of different products being assembled in high volumes. Many of the products were new designs, although they were typically similar to other types of products made previously. In almost every situation the products were designed by engineers with numerous years of experience, many of whom were a legend in their own minds, nonetheless some previously untried component or aspect of a product would fail and we would all be caught by surprise. It might have been plastic cracking or degrading due to UV radiation, tapes or adhesives failing because of major temperature changes, electrical or electronic components failing, paints fading or peeling, countless types of situations that at times challenged

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one’s imagination. But the failures were not supposed to happen and many times the engineer would ultimately be blamed for a poor design. After a couple of years of putting out fires I realized that I really needed to know first-hand whether a certain product or concept was really going to be reliable under adverse conditions, and not just depend on someone’s expertise or the data suppliers would provide. I not only needed to see for myself if the product or component would fail under adverse conditions, but I also needed to know how it would fail and what the end result would be. If a transformer could fail because moisture somehow got on it, would it short out internally and silently die, or would it catastrophically fail, begin arcing and start a fire? If a product was going to be held together with a two-sided adhesive foam tape to avoid visible fasteners, although the adhesion was unsurpassed at room temperature, would the tape withstand shipping vibration and drop shock if the product was frozen to zero degrees? There were countless scenarios I was being faced with routinely that I did not have first-hand experience with, and unfortunately there were no product sheets that would explain what to expect during such adverse scenarios, so I needed to start finding out for myself and stop taking people’s word for how the product should behave. As the Director of Quality at the time, I approached my boss, who was the President of the Corporation, and suggested that he allow me to build a product reliability test center within the main plant. I explained that I could equip the center in order to perform such tests that could prove out new designs and hopefully reduce the costs associated with product failures. I also felt it would even impress touring customers with our new capability. After months of my persistence he somewhat reluctantly allowed me to set something up, and gave me an abandoned room that was a real eyesore. He offered to have maintenance clean it up and repaint the walls and ceiling, but never felt it would be something we would ever want to show a customer. He accepted the possible value in having it, and probably more than anything else just wanted to get me off his back. Shortly thereafter, I befriended the head of our maintenance department and got him to help me figure out ways we could improve the looks of the area, panel the walls, carpet the floor, and add a dropceiling, without the costs becoming noticeable. In the end it was a truly impressive facility, but now lacking any testing equipment. I hired a reliability test engineer to run the test center for me. Our next move was to secure testing apparatus. Fortunately the company had made an investment years earlier in an accelerated weather testing machine, which we kept in a corner of one of the fabrication departments, so I had this moved into my new test center. Then I had the maintenance department begin to build custom equipment for me, like flame testing booths, drop testing equipment, special oven chambers, tables for electrical tests, and tensile testing devices. Eventually we bought freezers that could take products down to – 408F, and over time we acquired numerous other pieces of equipment. Now we had the full capability of not only testing any kind of product or component and simulate most any kind of condition, but I also gained first-hand knowledge of true failure mode and effect analysis, no longer theorizing on how a product might behave under adverse conditions and ultimately react. I was now the only one who could speak from first-hand experience.

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This facility became so impressive that it became the first stop on any customer tour of the company. The President was so proud of it you would have thought it was his idea from the start, forgetting about the dirt-hole room I was originally given only after a long and persistent battle. More importantly, the facility helped us begin to make the right design decisions, no longer based on educated guesses, but proven tests. Scrap, rework, and warranty costs continued to come down. Very surprisingly, new product and material performance characteristics began to surface, many past theories were turned upside-down, and numerous discoveries were made. Some customers were so impressed with the facility they began to send us other products and materials to test for them from other suppliers outside of our industry. They would no longer accept that these other products or materials would withstand what they would be subjected to, and sent them to us to prove out. So we really began to be recognized by our customers as the product experts in our industry. We even began to receive requests from smaller companies totally unrelated to our industry, that wanted to know if we could test their new products and designs for them, which began to make this an actual revenue center as opposed to just an operating expense. One of the real benefits came a year after we had it up and running, as it related to UL. We pursued UL approval on all the constant new electrical products we were designing and manufacturing, and the UL testing and approval process routinely took eight to twelve weeks and could cost $7000 to $12,000. Being in a job shop environment meant that we needed to turn products around quickly, from design and engineering, through to production. This UL approval process was a definite holdup. During one of our many meetings with UL on a new product concept that would require testing and would take the usual amount of time, we took them for a tour of our new test center. They were impressed to see that we probably had better equipment than even they had, and were fully capable of performing all the same tests. They recommended that we pursue having our lab certified, which at the time we did not know was possible, which would then allow us to perform many of the tests we would have waited for them to conduct. In a very short period of time they certified our lab and we began supplying them with the test data that they could then selectively cross-check, and we were getting our newly developed products UL approved in one to two weeks, as opposed to the usual eight to twelve weeks. Another real benefit of the in-house test center, even if it is not certified, is it enables the manufacturer to pretest products using the approval agency’s criteria and test parameters, and ensure the product will pass the tests prior to submitting the product to them for testing and approvals, and thereby save the time and expense associated with having the product fail their tests and have to resubmit. Submitting products for testing and certification is expensive and time-consuming, so having the ability to pretest the product can be much more efficient and cost-effective for the manufacturer. This can further be a benefit for the manufacturer for “self-certification” for those products that are being shipped to Europe. As product liability incidents eventually surfaced, most often just based on allegations as opposed to actual facts, such as fire cases, I was then able to recreate

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the condition and see exactly whether the product was truly capable of producing the final result. If a building caught on fire in the middle of the night, and insurance and fire investigators felt the fire originated with our product, I could simulate various conditions the product was being subjected to and prove to them that the product could not have started the fire, but was merely a victim of the same fire. This facility really became a major asset to the corporation, helping us to design better and more reliable products for the future, as well as to invent a lot of new products and special coatings, which we capitalized on. Five or six years later, my little test center became part of a whole new corporate technology center, as the company continued to grow and expand.

6.4 COMPLYING WITH DOMESTIC OR INTERNATIONAL STANDARDS Some manufacturers’ building products for domestic markets, such as electrical products for use by consumers, may have the option to design in accordance with the UL standard, or placing a product on the market that is not certified by UL or some other safety standards organization. The primary reason for not complying with the standard will largely relate to the requirements of the standard, which then make the product more expensive to build.

6.5

TESTING PRODUCTS AND REACTING TO TEST RESULTS

As I conduct in-house seminars for companies of all sizes, and even during various public presentations, it is surprising how many reliability test engineers will approach me afterward and comment on the portion of the presentation that dealt with product testing. During the seminar, or in many presentations, I will explain that management not only has to ensure new products are adequately tested, but there is a necessity for the management team to react to the test results. If the product failed the tests, it is not something management could just blow over. These test engineers will commonly explain the problems they face either getting management to test the newly developed products, or to react to product failures that surface during testing. Nobody has the time to test their products. We do find time after they start failing all across the country, however. A company may insist their test engineers test a new design, but when it fails they just ignore the results. Initially they may have just been looking for that added assurance, maybe something they would promote to their customer, and when it fails it becomes too complicated to figure out what to do, so they do not do anything. Another possibility is the product fails the reliability test, goes through a major redesign, but is not retested. “Well that fixed that!” There are numerous scenarios that are all very frustrating to these middlemanagement individuals that constantly have to deal with them and often find themselves a lone voice in the wind.

6.5

TESTING PRODUCTS AND REACTING TO TEST RESULTS

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What many organizations do not realize is that when they test a product and it fails, that testing report can become a “Dangerous Document” to them if the product ever becomes the subject of a lawsuit. As stated in the beginning of the chapter, when a company enters into litigation one of the first questions that will commonly surface will be whether the product was ever tested before being launched. If not, the manufacturer will likely face a charge of negligence for what will be perceived by the courts as nothing more than racing the product to the marketplace in order to make money. But if the manufacturer states that they did test it, then there will be an immediate demand to see the test reports. In this case this become the dangerous document: proof that the manufacturer had prior knowledge there was a problem with the design, and failed to do anything about it. Manufacturers not only need to test their products and new designs, but they must react to the results of such testing: “The product failed, we redesigned it, retested it, and the new design passed.”

7 Warnings and Instructions

Inadequate warnings and instructions were found to be the leading cause of product liability lawsuits for one major insurance company. As I am routinely brought into manufacturing corporations to teach in-house seminars on product safety and liability prevention, I never cease to be amazed at the companies whose management and engineering teams have no idea what the Z535 standards are. The Z535.4 standards are the standards for warning label design. It is the state of the art for warning labels, and yet I will walk into a major international manufacturing company producing high speed machines or high voltage control systems, and neither the engineering nor quality departments will have ever heard of this standard. Upon further plant inspection I will notice that the warnings they are using are vintage 20 years ago. How do companies, and especially engineering departments, lack such knowledge? Just as the design of products and incorporation of the latest safeguards to prove the products are state of the art are critical, so are the warnings and instructions. Plaintiffs will look for the opportunity to challenge the adequacy of the warnings and instructions, as well as the conspicuousness of the warnings placement. So if the manufacturer is not even knowledgeable of the standards for warning label design, how could they hope to prove adequacy? Beyond the aspect of a good product liability defense, a Z535.4 warning label is quicker and easier to understand and will be much more effective in helping to prevent the possibility of an injury in the first place, which is incentive enough to ensure compliance to the standard.

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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7.1

WARNINGS AND INSTRUCTIONS

THE LEGAL DUTY TO WARN

Under the Third Restatement of Torts, the manufacturer can be held liable if it does not adequately warn of foreseeable product hazards that are not readily apparent to the typical user or, where appropriate, give instructions on the safe use of the product to reduce its risks. A product can be considered defective if the warnings or instructions that accompany the unit do not apprise the consumer of the foreseeable risks involved with the use of that product. A product is defective because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller . . . and the omission of the instructions or warnings renders the product not reasonably safe.

Under this theory, the Third Restatement maintains a negligence theory of liability. In order to prevail on the theory of defective warnings, the plaintiff must show that adequate warnings of foreseeable risks were not provided. The Restatement provides that warnings must be given “for inherent risks that reasonably foreseeable product users and consumers would reasonably deem material or significant in deciding whether to use or consume the product.” When analyzing the reasonableness of these warnings, the court should “focus on various factors, such as content and comprehensibility, intensity of expression, and the characteristics of expected user groups.” The rationale behind the warning requirement is “. . . to protect the interests of those reasonably foreseeable users or consumers who would, based on their own reasonable assessment of the risks and benefits, decline product use . . .” Therefore, a manufacturer can be liable for defective warnings and instructions if it fails to apprise a consumer of all the risks of using the product. Most courts continue to adhere to the belief that a manufacturer’s failure to adequately warn of a nonobvious product risk can give rise to both a claim of negligence and a claim of strict liability for a marketing defect. As a result, the plaintiff gets to submit them both to the jury. The Restatement (Third) reiterates, there are three categories of product defects: † † †

Defects in manufacturing, Defects in design, and Defects in warnings or instructions.

In a warning defect case, the plaintiff attempts to prove that the defendant failed to provide an adequate warning that conveyed to the user the magnitude of the known risk. Under this doctrine, the knowledge of that danger becomes the liability of the manufacturer. Armed with this knowledge, the question becomes, “Did the manufacturer act reasonably in not providing a warning or in providing the warning as drafted?” The first approach is the subjective, ex post facto testimony. Under this pursuit, a plaintiff is allowed to provide postaccident testimony regarding whether she would have read and heeded an adequate warning, had the defendant so provided.

7.2

PRESUMPTION

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The law of failure to warn is built on a premise for which there is remarkably little empirical proof: that the presence or form of product warnings actually affects consumer behavior in the real world. Courts simply assume that this is true. So do plaintiffs’ experts, who then launch into a discourse exploring learned-sounding “principles” for an adequate and effective warning and conclude or imply that things would have been different if only such a warning had been given. They criticize by comparison any warning that was given, invoking such things as the need for signal words, placement, consequence information, and so forth.

7.2

PRESUMPTION

Many courts subscribe to the presumption that had an adequate warning been given, the user would have read and heeded such a warning. This is referred to as the “read and heed assumption.” Under products liability law, there is a presumption that if a product comes with a warning, the user will read and heed the warning. This presumption operates to the benefit of the manufacturer or seller where adequate warnings are given because the manufacturer receives the benefit of the doubt that the warning it provided is effective in alerting the user of the product’s potential danger. If no warning is given, however, the presumption works in favor of the plaintiff because causation is presumed. This heeding presumption is now the majority rule, with the effect that plaintiffs are relieved of the burden of proof on the element of causation in a warning claim. If the plaintiff is successful in this attack on the defendant with the court and jury, the plaintiff is able to bypass causation (or having to prove any other defective condition in a product), by identifying that the actual defect was the lack of adequate warning. The origin of this presumption may be found in Comment ( j) of section 402A of the Second Restatement of Torts, which states “Where warning is given, the seller may reasonably assume that it will be read and heeded; and a product bearing such a warning, which is safe for use if it is followed, is not in a defective condition, nor is it unreasonably dangerous.” Therefore, if a defendant can take refuge in supplying what is viewed as adequate warning, than the plaintiff should be entitled to an opposite presumption. In general, products liability failure-to-warn cases involve either risk reduction warnings or informedchoice warnings. In the former class, a user is provided with either safe-use instructions or is made aware of the magnitude of the risk involved in using a product. Whether the manufacturer owed the plaintiff a duty to warn is a question of law for the court, at least where the material facts that would determine the existence of that duty are not subject to reasonable dispute. Most of the elements to determine whether the manufacturer owes a duty to warn are determined by the nature of the risk allegedly presented by the product. In particular, a manufacturer has no duty to provide warnings against risks that are 1. Obvious to the ordinary user of the product or a matter of common knowledge, or 2. Not reasonably foreseeable, or so unlikely that the foreseeability of the occurrence is remote.

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Although courts often treat these factors as if they simply went to causation or to the adequacy of the warning that was given, and submit them for the jury as part of those questions, they initially define whether the manufacturer had a duty to give a warning at all. That should be treated as a question of law for the court. The first limitation on the manufacturer’s duty recognizes the irrationality of requiring a warning that would be superfluous because it was already generally known to the public or telegraphed by the product itself. The second limitation derives from the traditional tort rule that there is no duty to guard against a highly unlikely harm. In the product liability context, this means the manufacturer has no duty to warn of a risk that is “remotely possible to the unknown few in the population.” Both of these are initial questions to determine whether the manufacturer had a duty to warn, and as a threshold matter should be questions of law for the court. To the extent that a genuine issue of fact may arise because reasonable minds could disagree on whether the risk was remote, obvious, or generally known, the burden of proof should be on the plaintiff. It should be noted, however, that warnings cannot be used to make an unreasonably dangerous product safe. “When a safer design can reasonably be implemented, . . . , adoption of the safer design is required over a warning that leaves a significant residuum of risks.” If a reasonable alternative design (RAD) exists that would eliminate the risk of harm, providing adequate instructions and warnings will not make the product safe. Therefore, a manufacturer will be liable for failing to implement a RAD, even if the warnings and instructions fully apprise the consumer of all of the risks.

7.3

NO NEED TO WARN SOPHISTICATED USERS

The California Supreme Court ruled in April of 2008 that manufacturers cannot be held liable for not warning professionals about product dangers that should be known among members of their trade. The High Court ruled unanimously that manufacturers may assert the so-called sophisticated user doctrine, which says there is no duty to warn professionals about commonly known product dangers. “For those individuals or members of professions who do know or should know about the product’s potential dangers, that is, sophisticated users, the dangers should be obvious, and the defense should apply,” Justice Ming Chin wrote for the court. He added, “Just as a manufacturer need not warn ordinary consumers about generally known dangers, a manufacturer need not warn members of a trade or profession (sophisticated users) about dangers generally known to that trade or profession.” The underlying case was brought in 2002 by William Johnson, a certified heating, ventilation and air conditioning (HVAC) technician, who claimed he developed pulmonary fibrosis, a potentially fatal lung disease, while repairing an air conditioning system at a California bank branch. Johnson, represented by the Metzger Law Group of Long Beach, California, sued American Standard Inc., now known as Trane Inc., for failing to warn him that

7.4

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heating pipes containing R-22, a hydrochlorofluorocarbon refrigerant, could produce a toxic gas—phosgene, a nerve gas used in World War I. Affirming a lower court’s ruling, the state Supreme Court ruled that, “Requiring manufacturers to warn their products’ users in all instances would ‘invite mass consumer disregard and ultimate contempt for the warning process.’ ” Among others, the Product Liability Advisory Council Inc. filed an amicus curiae brief with the court. The case is Johnson v. American Standard Inc., 08 C.D.O.S. 3925.

7.4 THE 2007 ANSI Z535.4 STANDARD FOR PRODUCT SAFETY SIGNS AND LABELS1 It had been five years since the ANSI Z535.4 Standard for Product Safety Signs and Labels were last published prior to the 2007 revision. During this time, the field of safety communications has developed on a global basis towards international approaches that establish common worldwide practices. The good news was that the ANSI Z535 committee had taken the necessary steps to keep their standards relevant for both national and international uses. “Harmonization” was the key word used during the five years of ANSI Z535 committee meetings and this concept, which means the melding of ANSI and ISO standards where possible, formed the basis for many of the change proposals that were accepted by the committee for the standards’ revision. For product manufacturers, the ANSI Z535.4 standard is of critical importance because it is used by U.S. courts as the foundation for what is considered “best practice” for product safety labeling. As such, this standard is a cornerstone for risk reduction for product manufacturers. By employing the concepts presented in ANSI Z535.4 wisely and the outcome should improve product safety and reduce product liability exposure. 7.4.1

Towards a Worldwide System for Safety Labeling

One of the most frequently asked questions has been, “Is there a safety label format that can be used for both United States and international markets?” The answer now is, “Yes.” The 2007 ANSI Z535.4 Product Safety Sign and Label Standard introduced a new era of safety sign design by officially recognizing, and thereby validating, the ability to use the international ISO approaches to safety labeling in the United States. Over the past decade both the U.S. and ISO committees have worked hard to develop standards incorporating concepts that recognize a truly international approach to safety labeling. In 2004 the ISO standard for product safety labels was published, ISO 3864 Part 2. The real task was to create an ISO standard that was flexible such that a manufacturer had the ability to choose from among a select set of 1

Geoffrey Peckham, President, Clarion Safety Systems, Chair, ANSI Z535.1 Standard.

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format options that would work best for their intended audience. The Z535.4 concepts that made it into the final ISO 3864-2 standard include the use of signal words and colored signal word panels to indicate various levels of hazard severity, the use of safety symbols without surround shape and color, and the use of text messages in “combined” formats. The next task was to include ISO concepts within the ANSI Z535 standards. In accordance with the revision process, change proposals were submitted with the goal of harmonizing ANSI Z535.4 with the new ISO 3864-2 standard. Although debated, the change proposals were accepted and the 2007 revision of the ANSI Z535.4 standard is known for the significant steps taken to meet global marketplace requirements. 7.4.2

Acceptance of ISO Formats

The most important change occurring in the 2007 revision of the Z535.4 standard is its acceptance of all label formats included in ISO 3864-2 as equally valid choices as those formats contained in the Z535.4 standard. This change is communicated in Section 3 of the revised standard with the following words: “3.1.1 ISO-formatted safety signs Product safety information may be conveyed by ISO formatted safety labels in compliance with ISO 3864-2, Graphical symbols—Safety colours and safety signs—Part 2: Design principles for product safety labels. See Annex C.” This text sets the stage for the complete acceptance of ISO formatted safety labels on products in the United States. Compliance with ISO 3864-2 is compliance with ANSI Z535.4. In technical standards writing terms, the above text is called “incorporation by reference” and it is the cleanest way to maintain conformance acceptance between two or more standards. An alternative approach would have been to excerpt some of the sections out of the ISO standard and place them into the ANSI standard. However, this approach would necessitate constant updating as the ISO standard goes through its periodic revisions. The justification for this change in the Z535.4 standard was that harmonization with ISO was necessary to keep the ANSI Z535 standards relevant in a world of rapid globalization. Product manufacturers need the option to standardize on an international approach to their safety markings and having conflicting standards in this area can result in placing unnecessary restrictions on the ability to make a safer product available. The U.S. ANSI TAG to the ISO committee in charge of ISO 3864 was successful in working with ISO to adopt the DANGER, WARNING, CAUTION signal word formats and colors used within the ANSI Z535 standards. Now it was the ANSI committee’s turn to reciprocate and accept international formats if possible, which it did. The significance of this change will be profound. Product manufacturers will be able to consider several international formatting approaches for their safety labeling and still be in conformance with the ANSI Z535.4 standard. There are many factors that should be carefully considered before deciding which format you will choose for your products safety labeling. Manufacturers now have the opportunity to make choices that are best suited for their products, intended audiences and markets.

7.4

7.4.3

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Examples of ISO 3864-2 Formatting Options

7.4.3.1 Product Safety Labels According to the international standard for product safety labels, ISO 3864-2: 2004, a product safety label is defined as: “3.9 Product Safety Label: Label on a product that informs the observer of one or more potential hazards and describes the safety precautions and/or actions required to avoid the hazard(s).”2 Several formats are described that convey both the hazard description and hazard avoidance information necessary for use on product safety labels. Option 1. The use of symbol-only formats as defined by ISO 3864-1 typically use two or more symbol labels to convey both items of content (hazard description/ hazard avoidance) (Fig. 7.1). Option 2. Symbols are used with supplementary text. Here text is either positioned beside or incorporated into the symbol-based safety sign to communicate a more complex message and reinforce the symbol sign’s meaning (Fig. 7.2). Option 3. This includes the use of severity level panels. The use of symbols with a text message in combination with a “hazard severity panel” is the option that most mimics the ANSI Z535.4 formats used in the United States. Like the Z535.4 “signal word panel,” the hazard severity panel is used to convey the level of risk associated with the hazard (Fig. 7.3).

Figure 7.1 Warning sign, prohibition sign, and mandatory action sign. (See color insert.)

Figure 7.2 Examples of the use of supplementary text. (See color insert.)

2

ISO 3864-2:2004.

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Figure 7.3 Example of a product safety label using a hazard severity panel. (See color insert.)

7.4.3.2 Hazard Severity Panels Similar to the ANSI Z535.4 standard, the ISO 3864-2 standard defines the hazard severity panel (signal word panel in ANSI Z535.4) as “3.7 Hazard Severity Panel: Area of a combination or multiple product safety labels that communicates the category of risk associated with a hazard. NOTE: This panel contains the general warning sign, a signal word and the corresponding background colour . . .” (Fig. 7.4). ISO 3864-2 incorporates the same DANGER, WARNING, CAUTION three-tier signal word system for identifying levels of hazard seriousness (“risk” in the ISO vocabulary). The same use of color as is found in the Z535.4 standard is used in the ISO standard for each of the three signal words: red for danger, orange for warning, and yellow for caution. Concerning harmonization of safety labels between ANSI and ISO, the ISO 3864-2 addition of nearly identical definitions for the signal words and the use of these signal words in safety label formats represented a significant achievement and made the reverse harmonization easier (ISO concepts back into the ANSI standards). 7.4.4

Incorporation of the ISO Version of the Safety Alert Symbol

In order to harmonize the ANSI Z535 formats with ISO 3864 formats, the Z535 standards needed to recognize the “General Warning Sign” version of the safety alert

Figure 7.4 Hazard severity panels. The yellow safety alert symbol incorporated in these hazard severity panels is the general warning sign W001 specified in ISO 7010. (See color insert.)

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Figure 7.5 The safety alert symbol. (See color insert.)

symbol that was adopted by ISO as the only form of the symbol ISO would allow. The difference in safety alert symbols was the only element that separated an ISO 3864-2 symbol panel þ text panel þ severity level panel format from an ANSI Z535.4 safety label that contained a symbol, text message, and signal word panel. The acceptance of the yellow ISO version of this symbol as the safety alert symbol was absolutely critical for harmonization and this was done. The 2007 revision of the ANSI Z535.4 standard defines the safety alert symbol as Safety Alert Symbol: A symbol which indicates a potential personal injury hazard. It is composed of an equilateral triangle surrounding an exclamation mark. The safety alert symbol shall not be used to alert persons to property-damage-only accidents. (See Fig. 7.5.) A, For use with DANGER signal word (white triangle, red exclamation mark, and red background). B, For use with WARNING signal word (black triangle, orange exclamation mark). C, For use with CAUTION signal word (black triangle, yellow exclamation mark) D and E, For use with DANGER, WARNING, CAUTION signal words (yellow background, black border, and black exclamation mark. (E) has a yellow border around the black border.) 1 D and E are provided to allow for consistency with certain ISO standards, such as ISO 3864-1 and ISO 3864-2.

Note that only the D and E versions shown above are allowed by the ISO standard. Also note that the above definition and illustration appears in the Z535.2 Standard for Environmental and Facility Safety Signs, the ANSI Z535.5 Standard for Temporary Tags and Barricade Tapes, and in the new ANSI Z535.6 Standard for Safety Information in Collateral Material. In this way, the new international look to the signal word panel has the opportunity to be used in all of the visual safety communication forms covered by the ANSI Z535 standards, in line with its growing use worldwide. As an aside, so you can better understand the standards-making process, the following is the logic behind the discussion in ISO regarding the safety alert symbol’s design (Fig. 7.6). In the past, the ISO 3864 standard defined the symbol that consisted of a triangle with an exclamation mark as the “General Warning Sign.” This sign was

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Figure 7.6 Examples of the safety alert symbol with the new versions on the right. (See color insert.)

(and is) used to indicate the risk of personal injury when no other specific safety sign exists to communicate the intended message. The sign must be accompanied by other text or other symbols to convey a safety message (i.e., it is too abstract on its own to communicate specific safety information). When it came time to illustrate the use of signal words for product safety labels, the ISO nations involved in the writing of ISO 3864-2 insisted that the triangle-with-exclamation-mark symbol appearing in the severity level panel must be identical to the ISO 3864-1 general warning sign. Given the committee’s prior work, this makes sense for several key reasons: †

†

†

†

At the international standardization level, you should not have more than one symbol for the same meaning. The combination of a specific color with a surround shape is key to the ISO vocabulary of safety symbols. Yellow is always used for the triangular shaped warning signs as defined by ISO 3864-1. Thus, allowing black or white triangle versions would contradict this principle. A family of standards, such as ISO 3864-1 and ISO 3864-2, should not contradict themselves by having differences in their key concepts. ISO 7010 (the collection document for standardized safety signs) includes the general warning sign and ISO 3864-2 does not differ from its proscribed symbol.

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Figure 7.7 Example of a safety label that uses the preferred signal word NOTICE to address practices not related to personal injury. (See color insert.)

7.4.5

Revised Signal Word Definitions and a New Signal Word

After three years of committee discussion that reviewed over 20 years of debate, the ANSI Z535 committee agreed to revising the definitions for the signal words DANGER, WARNING, and CAUTION and to adding a fourth signal word, NOTICE, for use in nonpersonal injury related safety signs and labels (Fig. 7.7). The justification for this change was that many manufacturers desired to create more of a distinction for property damage signs than is found between using CAUTION with the safety alert symbol or using CAUTION without the safety alert symbol (which was the current practice defined in the Z535.4 standard for safety signs and labels intended for warning of property damage only hazards). The committee agreed and decided to phase out the word CAUTION without the safety alert symbol for property damage safety signs by first incorporating the “preferred” option of using the signal word NOTICE (also without a safety alert symbol) for this purpose, and then noting that the use of CAUTION without the safety alert symbol will be eliminated in the 2011 version of the standards. The preferred use of NOTICE and the alternative use of CAUTION without safety alert symbols to address practices not related to personal injury (Fig. 7.8) also correspond with the ANSI Z535.2 Standard for Environmental and Facility Safety Signs. The Z535.2 standard will also eliminate the CAUTION without the safety alert symbol alternative option in its 2011 version, again with a goal of assisting to differentiate between safety messages indicating personal injury and those related only to property damage.

Figure 7.8 Example of a safety label that uses the alternative signal word CAUTION to address practices not related to personal injury. (See color insert.)

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All signal word definitions will undergo slight revisions in wording—revisions that were made to make it easier to understand the differences between them. Revisions include deleting the word “imminently” from the signal word definition of DANGER, and deleting the word potentially from both the WARNING and CAUTION signal word definitions. In essence, the definitions for DANGER, WARNING, and CAUTION will read, “Indicates a hazardous situation” instead of “Indicates an imminently or potentially hazardous situation.” The revised definitions are as follows: Signal Word: The word that calls attention to the safety sign and designates a degree or level of hazard seriousness. The signal words for product safety signs are DANGER, WARNING, CAUTION, and NOTICE. See Annex E for guidance in selecting a signal word. DANGER: Indicates a hazardous situation, which, if not avoided, will result in death or serious injury. This signal word is to be limited to the most extreme situations. WARNING: Indicates a hazardous situation, which, if not avoided, could result in death or serious injury. CAUTION: Indicates a hazardous situation, which, if not avoided, could result in minor or moderate injury. It may also be used without the safety alert symbol as an alternative to NOTICE. NOTICE: NOTICE is the preferred signal word to address practices not related to personal injury. The safety alert symbol shall not be used with this signal word. As an alternative to NOTICE the word CAUTION without the safety alert symbol may be used to indicate a message not related to personal injury. Footnote: it was the intention of the ANSI Z535 Committee to eliminate the alternative of using the signal word CAUTION without the safety alert symbol to indicate a hazardous situation not related to personal injury in the 2011 version of this standard. “This will assist in making more of a differentiation between safety messages indicating personal injury and messages not related to personal injury.” One of the results of this change is that the ANSI Z535.4 signal word definitions now correspond with their counterpart definitions within all of the ANSI Z535 standards series. Furthermore the ANSI Z535.4 signal word definitions are nearly identical to the ISO 3864-2 Graphical symbols—safety colors and safety signs—Part 2: Design principles for product safety labels standard. ISO 3864-2 incorporates the same DANGER, WARNING, CAUTION three-tier signal word system for identifying levels of hazard seriousness (the term “risk” in the ISO standard instead of “hazard seriousness”). Note also that the ISO standard does not include the signal word NOTICE because the ISO 3864 standard only covers safety signs intended to communicate information regarding hazards related to personal injury.

7.4

7.4.6

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Addition of a Risk Estimation and Signal Word Selection Annex

A new annex titled Risk Estimation and Signal Word Selection (Annex E in the 2007 ANSI Z535.4 standard) will be added to the ANSI Z535.2, .4, .5, and .6 standards. This annex will be a valuable tool to assist in explaining the definitions and proper use of each of the signal words with a risk estimation model discussion and illustrations. The scope of this annex is: “E1 Scope: Signal words are selected based on the risk that results from not following the safety message. The level or risk determines signal words, safety colors and whether or not to use the safety alert symbol. This annex provides guidance for estimating risk and selecting signal words.” Probably the easiest way to understand the concepts presented in this annex is to look at the matrices that illustrate the signal word selection process in Fig. 7.9. The E4.1 Signal Word Selection Matrices show the signal words, colors, and presence or absence of safety alert symbol that are assigned for each combination of accident probability, worst credible harm, and probability of worst credible harm. This new Annex also includes a “Signal Word Selection Process” flowchart, which walks the user through the signal word decision and selection steps necessary to determine the appropriate signal word choice. In addition to the charts and

Figure 7.9 Risk estimation and signal word selection matrix in Z535.4 Annex E. (See color insert.)

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matrixes, perhaps the best feature of the new Annex is its straightforward discussion regarding what constitutes serious injury compared to what is considered minor or moderate injury. The addition of the new Annex, along with the simpler redefinitions of the signal words in the body of the standards, makes the Z535 standards easier to understand and apply. 7.4.7

New Language Translations

The previous 2002 version of Annex D in ANSI Z535.4 had 16 language translations— Chinese, Danish, Dutch, Finnish, French, German, Greek, Italian, Japanese, Korean, Norwegian, Portuguese, Russian, Spanish, Swedish, and Turkish. The 2007 revision adds an additional 13 languages including Arabic, Czech, Estonian, Farsi, Hebrew, Hungarian, Latvian, Lithuanian, Polish, Slovak, Slovenian, Thai, and Vietnamese. This Annex is intended for use by manufacturers exporting products from the United States. The scope of this Annex is “D1 Scope: Translation of the signal words and word message are optional considerations. These translations may vary by region and dialect. It is recommended that translations be checked regarding their appropriateness for the intended audience.”3 The 2007 Annex D revision changed what was referred to in the 2002 version as “Chinese” to “Chinese Simplified.” The translation remains the same. The 2007 revision makes spelling corrections to four of the 2002 signal word translations—Greek, Japanese, Portuguese, and Swedish. It should be noted that when utilizing translated signal words for use within a safety label’s signal word panel box for a product that is intended for export, the yellow ISO safety alert symbol version should be utilized. As explained above, with the 2007 revision of the ANSI Z535 standards, this version of the safety alert symbol is now an option for manufacturers to use for all of their products, domestic or exported. As 13 language translations were added to the translation chart, the font size of the translations appears smaller than the previous 2002 version. The electronic version of this standard allows for enhanced viewing of character details, which should be especially helpful with abstract languages such as Arabic, Chinese Simplified, Farsi, Japanese, Korean, and Thai. All of the signal word translations in Annex D (see Fig. 7.10) have been verified by several sources familiar with the translation of safety communications. 7.4.7.1 Addition of Translations for the new ANSI Z535.4 Signal Word “NOTICE.” The new ANSI Z535.4 signal word “NOTICE” (the preferred signal word to address practices not related to personal injury) was also translated in the 2007 revision of Annex D (Fig. 7.11). This signal word and its translations are not italicized in this annex. Both italicized and nonitalicized fonts are allowed for this signal word. The ANSI Z535.4 and ANSI Z535.2 (Environmental and Facility Safety Signs) replaced the italicized examples within the Z535 family of standards and show NOTICE only in a nonitalicized font in the 2011 revisions. 3

ANSI Z535.4—2007 Draft, Annex D.

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Figure 7.10 Examples of translated safety labels (note the use of the yellow ISO safety alert symbol within the signal word panel—an ANSI Z535.4 2007 option). (See color insert.)

Customers and markets often determine whether or not the safety labels appearing on products need to be translated. Many manufacturers find that their compliance consultants and international customers do not require translation as long as the product’s manuals are translated into the language of the country in which the product is

Figure 7.11 Examples of translated safety labels using the preferred ANSI Z535.4 2007 signal word NOTICE to address practices not related to personal injury. (See color insert.)

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to be used. Other manufacturers find that their customers, distributors, and/or compliance consultants insist that safety labels be translated. 7.4.8

Update on Z535.64

A new standard, ANSI Z535.6, Product Safety Information in Product Manuals, Instructions, and Other Collateral Materials, has been added to the ANSI Z535 series. To date, the ANSI Z535 Accredited Standards Committee has published five American National Standards: † † † † †

ANSI ANSI ANSI ANSI ANSI

7.4.9

Z535.1: Z535.2: Z535.3: Z535.4: Z535.5:

Safety color code Environmental and facility safety signs Criteria for safety symbols Product safety signs and labels Safety tags and barricade tapes (for temporary hazards)

The Need for the New Standard

The five existing Z535 standards contain recommendations regarding the formats, colors, and symbols for safety signs used in environmental and facility applications, product applications, and accident prevention tags/tape, but do not address safety messages in product manuals, instructions, and other collateral materials. The absence of standardized formatting systems, combined with the increased awareness and use of ANSI Z535.4, has led to attempts to apply various aspects of ANSI Z535.4 to safety information in collateral materials. However, ANSI Z535.4 was not intended for and is not well suited to this purpose. Therefore, one purpose of ANSI Z535.6 is to address the applicability of elements of other ANSI Z535 standards to collateral materials. Different standards are needed for product signs and labels and collateral materials due to the differences between these two types of media. For example, collateral materials typically contain more information than a sign or label, address multiple hazards and contain multiple safety messages, provide longer and more detailed safety messages, contain multiple pages of information that cannot be viewed simultaneously, and can provide information that would be impractical on product safety signs, such as definitions of the safety alert symbol, signal words, and safety symbols. Also, unlike safety signs and labels, safety information in collateral materials must often be integrated with surrounding, nonsafety information. Collateral materials are typically not attached to the product, so issues related to reading conditions, distinctiveness, placement, expected life, and maintenance are different. In addition, the concept of a safe viewing distance is not generally applicable.

4

Steven M. Hall, J. Paul Frantz, Stephen L. Young, Timothy P. Rhoades, Judith J. Isaacson, and Charles G. Burhans, Applied Safety and Ergonomics, Inc.

7.5

7.5

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To respond to this need, the new standard provides a hazard communication system developed specifically for product safety information in collateral materials. It provides a common design direction intended to provide product safety information in an orderly and visually consistent manner. Certain graphical elements used in the other Z535 standards are included in Z535.6: † † †

Signal words (DANGER, WARNING, CAUTION, and NOTICE) The safety alert symbol Safety colors (red, orange, and yellow)

However, in order to adapt these graphical elements for use in collateral materials, the standard includes some unique features, such as different safety message formats depending on the relationship between the safety message and other information in the document, and provisions for presenting safety messages without safety colors. The following summarizes, in general terms, the contents of the new standard. 7.5.1

Scope

The standard sets forth requirements for the design and placement of safety messages in collateral materials. As in existing ANSI Z535 standards, such as Z535.2 and Z535.4, this standard is intended to apply to a broad range of products. Collateral materials include a variety of documents, such as owner’s manuals, instructions, user’s guides, maintenance or service manuals, assembly instructions, and safety manuals. Collateral materials may take the form of a single sheet of paper, a multipage document, instructions on a package or container, or a printable electronic document. 7.5.2

Signal Words

Many of the safety message formats in the standard use signal words to call attention to the safety message. Signal words are often used with the safety alert symbol to form a signal word panel (Fig. 7.12). The standard includes signal words that are used in other ANSI Z535 standards: DANGER, WARNING, CAUTION, and NOTICE. As with other Z535 standards,

Figure 7.12 Signal word panels (with optional color). (See color insert.)

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signal words are selected based on degree or level of hazard seriousness, specifically, the probability and severity of harm associated with not following the safety message. The signal word definitions in all of the ANSI Z535 standards’ 2006 editions have been updated. The definitions of DANGER, WARNING, and CAUTION when used with the safety alert symbol, have been edited for clarity, but the intended meaning has not changed. The definition of NOTICE has been updated in all standards, and the signal word has been added to Z535.4 and Z535.6. This signal word replaces CAUTION without the safety alert symbol for use with messages not related to personal injury, such as messages related to property damage only. In addition to the updated definitions, a detailed annex regarding risk assessment and signal word selection has been added to ANSI Z535 standards including Z535.6. 7.5.3

The Safety Alert Symbol

The standard includes formats that use the safety alert symbol (Fig. 7.13). The safety alert symbol indicates a potential personal injury hazard; it is not used for messages related to property damage only. The safety alert symbol may be used alone or in conjunction with a signal word in a signal word panel. When presented as a black triangle with yellow fill, a black exclamation mark and, optionally, a yellow border (Fig. 7.14), the safety alert symbol is identical to the general warning sign defined in ISO 7010 – 2003, Graphical symbols—Safety colours and safety signs—Safety signs used in workplaces and public areas. This optional form of the safety alert symbol is being added to the ANSI Z535 standards’ 2006 editions to allow greater harmonization with ISO standards. For example, ANSI Z535.4–2006 will allow the use of this optional yellow and black safety alert symbol in signal word panels. Such a signal word panel is essentially identical to

Figure 7.13 Example of the safety alert symbol.

Figure 7.14 Examples of the safety alert symbol when formatted like the ISO general warning sign. (See color insert.)

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the optional hazard severity panel defined in ISO 3864-2–2004, Graphical symbols— Safety colours and safety signs—Part 2: Design principles for product safety labels. Although there is no ISO standard that is directly comparable with ANSI Z535.6, inclusion of this optional safety alert symbol allows safety messages in collateral materials to be visually similar to signs, labels, and tags that are formatted according to other ANSI Z535 standards and also to ISO standards. 7.5.4

Safety Colors

The use of color is not mandatory. However, if color is used with signal words, the same safety colors that are specified in the other Z535 standards are recommended. ANSI Z535.1 provides specifications for safety colors. 7.5.5

Types of Safety Messages

Unlike safety messages provided on signs or labels, safety messages in collateral materials can be classified based on their relationship to other information in the document. The standard defines four types of safety messages: supplemental directives, grouped safety messages, section safety messages, and embedded safety messages. 7.5.6

Supplemental Directives

Supplemental directives are messages that refer to other safety messages. They can be used to † †

†

†

Direct users to new, unique, unusual, or particularly important safety information; Direct users to product safety information in the document, in another document, or in some other source (e.g., product safety signs and labels); Make users aware of the safety-related nature and importance of an entire document or section within a document (e.g., a section of grouped safety messages); Reduce the need to repeat consequence information, especially generic consequences (e.g., “severe injury or death”), that may be associated with failure to read the document or refer to other sources of safety information.

Some typical supplemental directives include messages like † †

† † †

“Read all instructions before use to avoid injury,” “To avoid serious injury or death, follow the safety information in this document,” “Keep this manual,” “Read all product safety labels,” “Refer to local building codes for installation requirements.”

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Figure 7.15 Example of a supplemental directive with the safety alert symbol.

Recommended formats for supplemental directives use the safety alert symbol (Fig. 7.15) and, in cases where hazards and consequences can be determined with enough specificity to assign them, signal words. 7.5.7

Grouped Safety Messages

Grouped safety messages are presented in their own separate section or document, for example, an “Important Safety Information” chapter in a document or a separate “Safety Manual.” When provided in a section within a document, these messages are typically placed at the beginning of a document, before any procedural information to which they apply. A separate section or document of grouped safety messages must have a title or heading indicating that the information is safety-related. Signal words and the safety alert symbol are often not used with grouped safety messages, as there is no need to distinguish safety messages from other information in an all-safety section or document. 7.5.8

Section Safety Messages

Section safety messages apply to an entire section of a document. These messages can be used to † †

†

Provide safety information that applies throughout a procedure; Provide safety information that pertains to the topic of a particular section but that is not related to any particular procedural step or message in the section; Avoid unnecessary repetition of information about the hazards, consequences, or avoidance that applies to an entire section, paragraph, procedure, group of procedures, or other unit of text within the body of a document;

Figure 7.16 Example of a section safety message with a signal word panel section heading.

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Figure 7.17 Example of a section safety message with a safety alert symbol only.

†

Allow users to access procedural and other product-use information more easily and efficiently by reducing the extent to which a safety message interrupts or interferes with the access or flow of information. Section safety messages are typically located at the beginning of a section, before the information to which they apply. A signal word panel (Fig. 7.16) or a safety alert symbol (Fig. 7.17) typically precedes these messages.

7.5.9

Embedded Safety Messages

Embedded safety messages are integrated into procedures or into other nonsafety information. Integrating safety messages into procedures can be particularly helpful, as the safety message can be placed at the step in the procedure when it should be followed. A variety of formats are permitted for embedded safety messages in order to allow them to be better integrated with the surrounding information in a particular situation. Formats include use of signal words (Fig. 7.18), the safety alert symbol, consistently applied text treatments (e.g., bold, italics), or, when the content and context of the message make it clear that it has to do with safety, no special formatting. 7.5.10

Conclusion

Because ANSI Z535.6 provides a completely new scheme for classifying different types of safety messages and a variety of options for formatting safety messages, applying the standard to collateral materials will initially be more complicated than applying ANSI Z535.4 to product safety labels. However, the additional effort required to initially apply the standard can provide valuable benefits. The process of identifying and classifying safety messages provides an opportunity to reevaluate the content and location of safety messages, and to develop a consistent approach regarding when and where warnings are provided, both in collateral materials and via other media. The relative flexibility in formatting safety messages provides an

Figure 7.18 Example of an embedded safety message with signal word.

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opportunity to develop a custom style that is appropriate for the particular documents and that also is consistent with the new standard. Once this style has been established, developing future collateral materials should be significantly easier. As many different industries apply the standard to a wide variety of collateral materials over the next few years, areas of the standard in need of modification or refinement will likely be exposed. Users of the standard are encouraged to provide feedback to the Z535 committee and propose changes to improve the next edition of the standard.

8 Product Warranties Many manufacturers think the only thing they do or supply that relates to warranty, is the actual warranty or limited warranty form or contract clause provided at the time of contract or sale. What they do not realize are the potential liabilities they could face related to Implied or express warranties. An express warranty is a promise, ancillary to an underlying sales agreement, which is included in the written or oral terms of the sales agreement, under which the promisor assures the quality or performance of the goods sold. An express warranty can be created by the seller by any affirmation of fact or promise made by the seller to the buyer that relates to the goods and becomes part of the basis of the sale, or description of the goods that is made part of the basis of the sale, or sample or model that the whole of the goods shall conform to the sample or model, can all create an express warranty. This can sometimes become the case when competitors of the same type of product are both trying to make the sale, but the sales person for one of the competing companies exaggerates the expected performance of the product, which then becomes the basis of the sale and the reason why the buyer chose that product over the other similar product. Regardless of what the written warranty states, this affirmation of fact or promise made by the seller becomes part or the agreement. An implied warranty arises when something is sold by the seller for a purpose that the seller has reason to know is required, and that the buyer is relying on the seller’s skill and judgment to select or furnish suitable goods for that particular purpose. It is a warranty that is not expressly stated but that is recognized or imposed by the law based on the nature of the transaction. A buyer can sue a seller for breaching the implied warranty by selling goods unfit for their intended purpose. For example, a manufacturer’s buyer in Southern California is looking for a special type of outdoor adhesive that can be used to bond a certain product together that the manufacturer is going to mass produce and market across the country. The buyer talks to a sales representative from a local Southern California adhesive Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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supply company and explains the application and that the products will be sold in highvolume and used by customers year round from Montana and Maine, down to Texas and Florida. The adhesive company sales representative sells the buyer an adhesive that is popular for use in Southern California, but knows it could be a problem in colder climates, but does not share that knowledge with the buyer. The buyer purchases numerous containers of the adhesive, goes into full production of the end product, and starts shipping the products all around the country as planned. Shortly thereafter as it becomes winter the products in the northern climates begin to fall apart. The manufacturer has a major disaster unfolding, which will end up being extremely expensive to correct. The seller could become liable for Breach of Implied Warranty. The seller knew how the product was going to be used, and sold the buyer an adhesive that was unfit for the intended purpose. 8.1 EXAMPLES OF WARRANTY, WARRANTY DISCLAIMER, AND EXCLUSIVE REMEDY ABC Corporation warrants, for 12 months from the date of manufacture or for the duration of the published product shelf life, whichever is less, that at the time of shipment by ABC, the product is free of manufacturing defects and conforms to ABC’s published specifications in force on the date of acceptance by ABC of the order. ABC shall only be liable under this warranty if the material has been applied, used, and stored in accordance with ABC’s instructions. The purchaser must examine the product when received and promptly notify ABC in writing of any nonconformity before the product is used, or no later than 30 days after such nonconformity is first discovered. If ABC, in its sole discretion, determines that the product breached the above warranty, it will, in its sole discretion, replace the nonconforming product, refund the purchase price or issue a credit in the amount of the purchase price. This is the sole and exclusive remedy for breach of this warranty. Only an ABC officer is authorized to modify this warranty. The sales information on the ABC website and received by the customer during the sales process does not supersede this warranty and the specifications of the product in force on the date of sale. THE FOREGOING WARRANTY SHALL BE EXCLUSIVE AND IN LIEU OF ANY OTHER WARRANTY, EXPRESS OR IMPLIED, INCLUDING WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE AND ALL OTHER WARRANTIES OTHERWISE ARISING BY OPERATION OF LAW, COURSE OF DEALING, CUSTOM, TRADE, OR OTHERWISE. 8.2

LIMITATION OF LIABILITY

ABC shall not be liable in contract or in tort (including, without limitation, negligence, strict liability, or otherwise) for loss of sales, revenues or profits; cost of capital or funds; business interruption or cost of downtime, loss of use, damage to or loss of use of other property (real or personal); failure to realize expected savings; frustration of economic or business expectations; claims by third parties (other than for bodily injury), or economic losses of any kind; or for any special,

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incidental, indirect, consequential, punitive, or exemplary damages arising in any way out of the performance of, or failure to perform, this Agreement, even if ABC could foresee or has been advised of the possibility of such damages. The Parties expressly agree that these limitations on damages are allocations of risk constituting, in part, the consideration for this agreement, and also that such limitations shall survive the determination of any court of competent jurisdiction that any remedy provided in these terms or available at law fails of its essential purpose. 8.3 A BUSINESSPERSON’S GUIDE TO FEDERAL WARRANTY LAW (http://www.ftc.gov) This section is intended as a businessperson’s guide to the basic features of the Magnuson-Moss Warranty Act, the federal law governing warranties on consumer products. The text provides citations to specific sections of the law—the Warranty Act itself, the Rules the Federal Trade Commission (FTC) adopted under the Act, and the FTC’s Warranty Advertising Guides. For reference purposes, a supplement to this manual containing the Act, the Rules, and the Guides is available from the FTC’s Consumer Response Center. This manual also addresses some basic points of state law that you need to know to understand the requirements and prohibitions of the Magnuson-Moss Act. However, because state law varies, you may need to contact a private attorney or the offices of the attorneys general in the states where you do business to get specific state law information. The manual is intended as a tool for you to use in consultation with your attorney, not as a substitute for your attorney’s advice. The names of the companies in the examples in this manual are fictitious; any resemblance between them and the names of actual companies is completely coincidental.

Understanding Warranties Your warranty is a contract that commits you to stand behind your product.

Section 2-314 of the Uniform Commercial Code, which is law in every state but Louisiana, covers the implied warranty of merchantability.

Generally, a warranty is your promise, as a manufacturer or seller, to stand behind your product. It is a statement about the integrity of your product and about your commitment to correct problems when your product fails. The law recognizes two basic kinds of warranties—implied warranties and express warranties.

Implied Warranties Basically, your product is “merchantable” if it does what it is supposed to do.

Implied warranties are unspoken, unwritten promises, created by state law, that go from you, as a seller or merchant, to your customers. Implied warranties are based upon the common law principle of “fair value for money spent.” There are two

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Section 2-315 of the Uniform Commercial Code covers the implied warranty of fitness for a particular purpose. Implied warranties deal with the product at the time it is purchased. Generally, customers have four years to enforce an implied warranty claim.

Merchants of used goods also give implied warranties. You can sell without implied warranties—“as is”—in most states. To sell “as is” you must clearly and conspicuously disclaim implied warranties, generally in writing.

You cannot sell “as is” in some states. You cannot avoid implied warranties if you offer a written warranty on a consumer product. You cannot avoid responsibility for personal injury caused by a defect in your product, even if you sell “as is.”

types of implied warranties that occur in consumer product transactions. They are the implied warranty of merchantability and the implied warranty of fitness for a particular purpose. The implied warranty of merchantability is a merchant’s basic promise that the goods sold will do what they are supposed to do and that there is nothing significantly wrong with them. In other words, it is an implied promise that the goods are fit to be sold. The law says that merchants make this promise automatically every time they sell a product they are in business to sell. For example, if you, as an appliance retailer, sell an oven, you are promising that the oven is in proper condition for sale because it will do what ovens are supposed to do—bake food at controlled temperatures selected by the buyer. If the oven does not heat, or if it heats without proper temperature control, then the oven is not fit for sale as an oven, and your implied warranty of merchantability would be breached. In such a case, the law requires you to provide a remedy so that the buyer gets a working oven. The implied warranty of fitness for a particular purpose is a promise that the law says you, as a seller, make when your customer relies on your advice that a product can be used for some specific purpose. For example, suppose you are an appliance retailer and a customer asks for a clothes washer that can handle 15 pounds of laundry at a time. If you recommend a particular model, and the customer buys that model on the strength of your recommendation, the law says that you have made a warranty of fitness for a particular purpose. If the model you recommended proves unable to handle 15-pound loads, even though it may effectively wash 10-pound loads, your warranty of fitness for a particular purpose is breached. Implied warranties are promises about the condition of products at the time they are sold, but they do not assure that a product will last for any specific length of time. (The normal durability of a product is, of course, one aspect of a product’s merchantability or its fitness for a particular purpose.) Nor does the law say that everything that can possibly go wrong with a product falls within the scope of

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Section 2-313 of the Uniform Commercial Code covers express warranties.

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implied warranties. For example, implied warranties do not cover problems such as those caused by abuse, misuse, ordinary wear, failure to follow directions, or improper maintenance. Generally, there is no specified duration for implied warranties under state laws. However, the state statutes of limitations for breach of either an express or an implied warranty are generally four years from date of purchase. This means that buyers have four years in which to discover and seek a remedy for problems that were present in the product at the time it was sold. It does not mean that the product must last for four years. It means only that the product must be of normal durability, considering its nature and price. A special note is in order regarding implied warranties on used merchandise. An implied warranty of merchantability on a used product is a promise that it can be used as expected, given its type and price range. As with new merchandise, implied warranties on used merchandise apply only when the seller is a merchant who deals in such goods, not when a sale is made by a private individual. If you do not offer a written warranty, the law in most states allows you to disclaim implied warranties. However, selling without implied warranties may well indicate to potential customers that the product is risky—low quality, damaged, or discontinued—and therefore, should be available at a lower price. In order to disclaim implied warranties, you must inform consumers in a conspicuous manner, and generally in writing, that you will not be responsible if the product malfunctions or is defective. It must be clear to consumers that the entire product risk falls on them. You must specifically indicate that you do not warrant “merchantability,” or you must use a phrase such as “with all faults,” or “as is.” A few states have special laws on how you must phrase an “as is” disclosure. (For specific information on how your state treats “as is” disclosures, consult your attorney.) Some states do not allow you to sell consumer products “as is.” At this time, these states are Alabama, Connecticut, Kansas, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Hampshire,

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Vermont, Washington, West Virginia, and the District of Columbia. In those states, sellers have implied warranty obligations that cannot be avoided. Federal law prohibits you from disclaiming implied warranties on any consumer product if you offer a written warranty for that product (see What the Magnuson-Moss Act Requires) or sell a service contract on it (see Offering Service Contracts). You should be aware that even if you sell a product “as is” and it proves to be defective or dangerous and causes personal injury to someone, you still may be liable under the principles of product liability. Selling the product “as is” does not eliminate this liability.

Express Warranties Express warranties, unlike implied warranties, are not “read into” your sales contracts by state law; rather, you explicitly offer these warranties to your customers in the course of a sales transaction. They are promises and statements that you voluntarily make about your product or about your commitment to remedy the defects and malfunctions that some customers may experience. Express warranties can take a variety of forms, ranging from advertising claims to formal certificates. An express warranty can be made either orally or in writing. While oral warranties are important, only written warranties on consumer products are covered by the Magnuson-Moss Warranty Act.

Understanding the Magnuson-Moss Warranty Act The Act improves consumers’ access to warranty information.

The Act enables consumers to comparison shop for warranties.

The Magnuson-Moss Warranty Act is the federal law that governs consumer product warranties. Passed by Congress in 1975, the Act requires manufacturers and sellers of consumer products to provide consumers with detailed information about warranty coverage. In addition, it affects both the rights of consumers and the obligations of warrantors under written warranties. To understand the Act, it is useful to be aware of Congress’ intentions in passing it. First, Congress wanted to ensure that consumers could get complete information about warranty terms and conditions. By providing consumers with a way of learning what

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The Act encourages warranty competition.

The Act promotes timely and complete performance of warranty obligations.

The Act does not compel you to give a written warranty.

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warranty coverage is offered on a product before they buy, the Act gives consumers a way to know what to expect if something goes wrong, and thus helps to increase customer satisfaction. Second, Congress wanted to ensure that consumers could compare warranty coverage before buying. By comparing, consumers can choose a product with the best combination of price, features, and warranty coverage to meet individual needs. Congress intended to promote competition on the basis of warranty coverage. By assuring that consumers can get warranty information, the Act encourages sales promotion on the basis of warranty coverage and competition among companies to meet consumer preferences through various levels of warranty coverage. Finally, Congress wanted to strengthen existing incentives for companies to perform their warranty obligations in a timely and thorough manner and to resolve any disputes with a minimum of delay and expense to consumers. Thus, the Act makes it easier for consumers to pursue a remedy for breach of warranty in the courts, but it also creates a framework for companies to set up procedures for resolving disputes inexpensively and informally, without litigation.

What the Magnuson-Moss Act Does Not Require There are three FTC Rules under the Act.

In order to understand how the Act affects you as a businessperson, it is important first to understand what the Act does not require. First, the Act does not require any business to provide a written warranty. The Act allows businesses to determine whether to warrant their products in writing. However, once a business decides to offer a written warranty on a consumer product, it must comply with the Act. Second, the Act does not apply to oral warranties. Only written warranties are covered. Third, the Act does not apply to warranties on services. Only warranties on goods are covered. However, if your warranty covers both the parts provided for a repair and the workmanship in making that repair, the Act does apply to you. Finally, the Act does not apply to warranties on products sold for resale or for commercial purposes. The Act covers only warranties on consumer products. This means that only warranties on tangible property normally used for personal, family, or household purposes are covered. ( This includes property attached to or installed on real property.) Note that applicability of the Act to a particular

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product does not, however, depend upon how an individual buyer will use it. The following section of this manual summarizes what the Magnuson-Moss Warranty Act requires warrantors to do, what it prohibits them from doing, and how it affects warranty disputes.

What the Magnuson-Moss Act Requires Section 102 of the Act directs how to title your warranty. The Disclosure Rule {16 C.F.R. Part 701} directs what you must include in your warranty. The Pre-Sale Availability Rule {16 C.F. R. Part 702} directs how to make your warranty available before sale.

In passing the Magnuson-Moss Warranty Act, Congress specified a number of requirements that warrantors must meet. Congress also directed the FTC to adopt rules to cover other requirements. The FTC adopted three Rules under the Act, the Rule on Disclosure of Written Consumer Product Warranty Terms and Conditions (the Disclosure Rule), the Rule on Pre-Sale Availability of Written Warranty Terms (the Pre-Sale Availability Rule), and the Rule on Informal Dispute Settlement Procedures (the Dispute Resolution Rule). In addition, the FTC has issued an interpretive rule that clarifies certain terms and explains some of the provisions of the Act. This section summarizes all the requirements under the Act and the Rules. The Act and the Rules establish three basic requirements that may apply to you, either as a warrantor or a seller. 1. As a warrantor, you must designate, or title, your written warranty as either “full” or “limited.” 2. As a warrantor, you must state certain specified information about the coverage of your warranty in a single, clear, and easy-to-read document. 3. As a warrantor or a seller, you must ensure that warranties are available where your warranted consumer products are sold so that consumers can read them before buying.

If you give a written warranty on a consumer product, Section 108 of the Act prevents you from eliminating or restricting implied warranties.

The titling requirement, established by the Act, applies to all written warranties on consumer products costing more than $10. However, the disclosure and presale availability requirements, established by FTC Rules, apply to all written warranties on consumer products costing more than $15. Each of these three general requirements is explained in greater detail in the following chapters.

What the Magnuson-Moss Act Does Not Allow There are three prohibitions under the Magnuson-Moss Act. They involve implied warranties, so-called “tie-in sales” provisions, and deceptive or misleading warranty terms.

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Disclaimer or Modification of Implied Warranties With some exceptions, Section 102(c) of the Act prohibits you from including a tie-in sales provision in your warranty.

The Act prohibits anyone who offers a written warranty from disclaiming or modifying implied warranties. This means that no matter how broad or narrow your written warranty is, your customers will always receive the basic protection of the implied warranty of merchantability. This is explained in Understanding Warranties. There is one permissible modification of implied warranties, however. If you offer a “limited” written warranty, the law allows you to include a provision that restricts the duration of implied warranties to the duration of your limited warranty. For example, if you offer a two-year limited warranty, you can limit implied warranties to two years. However, if you offer a “full” written warranty, you cannot limit the duration of implied warranties. This matter is explained in Titling Written Warranties as “Full” or “Limited.” If you sell a consumer product with a written warranty from the product manufacturer, but you do not warrant the product in writing, you can disclaim your implied warranties. (These are the implied warranties under which the seller, not the manufacturer, would otherwise be responsible.) But, regardless of whether you warrant the products you sell, as a seller, you must give your customers copies of any written warranties from product manufacturers.

“Tie-In Sales” Provisions These are examples of prohibited tie-in sales provisions.

This is an example of a permissible warranty provision to use instead of a tie-in.

Generally, tie-in sales provisions are not allowed. Such a provision would require a purchaser of the warranted product to buy an item or service from a particular company to use with the warranted product in order to be eligible to receive a remedy under the warranty. The following are examples of prohibited tie-in sales provisions. In order to keep your new Plenum Brand Vacuum Cleaner warranty in effect, you must use genuine Plenum Brand Filter Bags. Failure to have scheduled maintenance performed, at your expense, by the Great American Maintenance Company, Inc., voids this warranty. Although you cannot use a tie-in sales provision, your warranty need not cover use of replacement parts, repairs, or maintenance that is inappropriate for your product. The following is an example of a permissible provision that excludes coverage of such things. Whereas necessary maintenance or repairs on your AudioMundo Stereo System can be performed by any company, we recommend that you use only authorized AudioMundo dealers. Improper or incorrectly performed maintenance or repair voids this warranty.

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Section 110(c) (2) of the Act prohibits deceptive warranties.

Although tie-in sales provisions generally are not allowed, you can include such a provision in your warranty if you can demonstrate to the satisfaction of the FTC that your product will not work properly without a specified item or service. If you believe that this is the case, you should contact the warranty staff of the FTC’s Bureau of Consumer Protection for information on how to apply for a waiver of the tie-in sales prohibition.

Deceptive Warranty Terms Section 110(d) of the Act makes breach of warranty a violation of federal law, and enables consumers to recover attorneys’ fees.

Obviously, warranties must not contain deceptive or misleading terms. You cannot offer a warranty that appears to provide coverage but, in fact, provides none. For example, a warranty covering only “moving parts” on an electronic product that has no moving parts would be deceptive and unlawful. Similarly, a warranty that promised service that the warrantor had no intention of providing or could not provide would be deceptive and unlawful.

How the Magnuson-Moss Act May Affect Warranty Disputes Two other features of the Magnuson-Moss Warranty Act are also important to warrantors. First, the Act makes it easier for consumers to take an unresolved warranty problem to court. Second, it encourages companies to use a less formal, and therefore less costly, alternative to legal proceedings. Such alternatives, known as dispute resolution mechanisms, can often be used to settle warranty complaints before they reach litigation.

Consumer Lawsuits Dispute Settlement Mechanisms use conciliation, mediation, or arbitration to resolve disputes. For more information, an FTC publication Handling Customer Complaints, is available from the Government Printing Office.

The Act makes it easier for purchasers to sue for breach of warranty by making breach of warranty a violation of federal law, and by allowing consumers to recover court costs and reasonable attorneys’ fees. This means that if you lose a lawsuit for breach of either a written or an implied warranty, you may have to pay the customer’s costs for bringing the suit, including lawyer’s fees. Because of the stringent federal jurisdictional requirements under the Act, most Magnuson-Moss lawsuits are brought in state court. However, major cases involving many consumers can be brought in federal court as class action suits under the Act. Although the consumer lawsuit provisions may have little effect on your warranty or your business, they are important to remember if you are involved in warranty disputes.

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Alternatives to Consumer Lawsuits If you require your customers to use a dispute settlement mechanism before suing under the Act, your mechanism must comply with the FTC’s Dispute Resolution Rule {16 C.F.R. Part 703}.

A mechanism that does not meet the standards of the Dispute Resolution Rule may still be a valuable tool for you.

Although the Act makes consumer lawsuits for breach of warranty easier to bring, its goal is not to promote more warranty litigation. On the contrary, the Act encourages companies to use informal dispute resolution mechanisms to settle warranty disputes with their customers. Basically, an informal dispute resolution mechanism is a system that works to resolve warranty problems that are at a stalemate. Such a mechanism may be run by an impartial third party, such as the Better Business Bureau, or by company employees whose only job is to administer the informal dispute resolution system. The impartial third party uses conciliation, mediation, or arbitration to settle warranty disputes. The Act allows warranties to include a provision that requires customers to try to resolve warranty disputes by means of the informal dispute resolution mechanism before going to court. (This provision applies only to cases based upon the MagnusonMoss Act.) If you include such a requirement in your warranty, your dispute resolution mechanism must meet the requirements stated in the FTC’s Rule on Informal Dispute Settlement Procedures (the Dispute Resolution Rule). Briefly, the Rule requires that a mechanism must: Be adequately funded and staffed to resolve all disputes quickly; Be available free of charge to consumers; Be able to settle disputes independently, without influence from the parties involved; Follow written procedures; Inform both parties when it receives notice of a dispute; Gather, investigate, and organize all information necessary to decide each dispute fairly and quickly; Provide each party an opportunity to present its side, to submit supporting materials, and to rebut points made by the other party; (the mechanism may allow oral presentations, but only if both parties agree); Inform both parties of the decision and the reasons supporting it within 40 days of receiving notice of a dispute; Issue decisions that are not binding; either party must be free to take the dispute to court if dissatisfied with the decision (however, companies may, and often do, agree to be bound by the decision); Keep complete records on all disputes; and Be audited annually for compliance with the Rule.

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It is clear from these standards that informal dispute resolution mechanisms under the Dispute Resolution Rule are not informal in the sense of being unstructured. Rather, they are informal because they do not involve the technical rules of evidence, procedure, and precedents that a court of law must use. Currently, the FTC’s staff is evaluating the Dispute Resolution Rule to determine if informal dispute resolution mechanisms can be made simpler and easier to use. To obtain more information about this review, contact the FTC’s warranty staff. As stated previously, you do not have to comply with the Dispute Resolution Rule if you do not require consumers to use a mechanism before bringing suit under the Magnuson-Moss Act. You may want to consider establishing a mechanism that will make settling warranty disputes easier, even though it may not meet the standards of the Dispute Resolution Rule.

Titling Written Warranties as “Full” or “Limited” REQUIREMENT I: SECTION 102 OF THE MAGNUSON-MOSS ACT.

Written warranties must be titled “full” or “limited.” As explained, this requirement applies to warranties on products costing more than $10.

“Full Warranty” means the coverage meets the federal minimum standards for comprehensive warranties, while “Limited Warranty” means the coverage does not.

The Magnuson-Moss Warranty Act requires that every written warranty on a consumer product that costs more than $10 have a title that says the warranty is either “full” or “limited.” (The Act calls these titles “designations.”) The title is intended to provide consumers, at a glance, with a key to some of the important terms and conditions of a warranty. The title “full warranty” is a shorthand message to consumers that the coverage meets the Act’s standards for comprehensive warranty coverage. Similarly, the title “limited warranty” alerts consumers that the coverage does not meet at least one of the Act’s standards, and that the coverage is less than full under the Act. What the terms “full” and “limited” mean determining whether your warranty is a full or a limited warranty is not difficult. If each of the following five statements is true about your warranty’s terms and conditions, it is a full warranty: 1. You do not limit the duration of implied warranties. 2. You provide warranty service to anyone who owns the product during the warranty period; that is, you do not limit coverage to first purchasers. 3. You provide warranty service free of charge, including such costs as returning the product or removing and reinstalling the product when necessary.

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4. You provide, at the consumer’s choice, either a replacement or a full refund if, after a reasonable number of tries, you are unable to repair the product. 5. You do not require consumers to perform any duty as a precondition for receiving service, except notifying you that service is needed, unless you can demonstrate that the duty is reasonable. You must be able to demonstrate that any duties you impose are reasonable. Requiring customers to return a registration card is an unreasonable duty that is not allowed in a full warranty f116 C.FR. §700.o´(b)g.

If any of these statements is not true, then your warranty is limited. You are not required to make your entire warranty full or limited. If the statements above are true about the coverage on only some parts of your product, or if the statements are true about the coverage during only one part of the warranty period, then your warranty is a multiple warranty that is part full and part limited. Examples of Full Warranties, Limited Warranties, and Multiple Warranties.

BOX 8.1 COUNTERPOINT CARPET CORP: FULL FIVE YEAR WARRANTY This is an example of a full warranty. It specifies that the customer has a right to a replacement or a refund if repairs are not possible. Notice that this full warranty does not cover every type of defect in the product.

What is Covered This warranty covers any defects in materials or workmanship, including installation, with the exceptions stated below.

How Long Coverage Lasts This warranty runs for five years from the date your carpet is installed.

What is not Covered This warranty does not cover fading or discoloration caused by exposure to sunlight or chemicals such as ammonia, laundry detergent, or household bleach. (For information on how to prevent fading or discoloration, consult our manual “Care Tips From Counterpoint Carpet,” available free from your Counterpoint dealer.)

What Counterpoint Will Do Counterpoint will repair any carpet that proves to be defective in materials or workmanship. In the event repair is not possible, Counterpoint will either replace your carpet with new carpet of

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similar composition and price, or refund the full purchase price of your carpet, whichever you prefer.

How To Get Service Contact any Counterpoint dealer, listed in the Yellow Pages under “Carpet,” or contact Counterpoint at 800-987-6543. A service representative will come to your home and take any necessary action to correct problems covered by this warranty.

How State Law Applies This warranty gives you specific legal rights, and you may also have other rights which vary from state to state.

When you decide on your warranty’s terms and conditions, consider eliminating unnecessary restrictions. Rather than adopting warranty terms just because they are common in your industry, let your experience guide you. For example, a limit on the duration of implied warranties may be the only provision that would prevent your written warranty from being full. If your experience indicates that you do not really need this restriction, you may wish to consult your attorney and eliminate it. Also, remember that the distinctions between a full and a limited warranty are specified by law, and that the legal meanings of the words full and limited in written consumer product warranties are far more narrow and specific than they are in ordinary usage. Avoid confusing the legal and ordinary meanings.

BOX 8.2 MAGNIFISOUND CORPORATION: LIMITED WARRANTY This is an example of a limited warranty. It is limited because there are requirements that the customer pay labor and postage charges, and that the customer return a registration card.

What Does This Warranty Cover? This warranty covers any defects or malfunctions in your new Magnifisound hearing aid.

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How Long Does the Coverage Last? This warranty lasts as long as you own your Magnifisound aid. Coverage terminates if you sell or otherwise transfer the aid.

What Will Magnifisound Do? Magnifisound will replace any defective or malfunctioning part at no charge. You must pay any labor charges.

What Does This Warranty Not Cover? Batteries or any problem that is caused by abuse, misuse, or an act of God (such as a flood) are not covered. Also, consequential and incidental damages are not recoverable under this warranty. Some states do not allow the exclusion or limitation of incidental or consequential damages, so the above limitation or exclusion may not apply to you.

How Do You Get Service? In order to be eligible for service under this warranty you MUST return the warranty registration card attached below within 30 days of purchasing the aid. If something goes wrong with your aid, send it postage paid with a brief written description of the problem to: Magnifisound Corp. Box 10000 Auditory, Ohio We will inspect your aid and contact you within 72 hours to give the results of our inspection and an estimate of the labor charges required to fix the aid. If you authorize repairs, we will return the repaired aid to you COD within 72 hours. You must pay any labor charges upon receipt of the repaired aid. If you inform us that you wish us to provide necessary parts to you but you wish to have repairs performed elsewhere, we will return the aid and replacement parts to you within 72 hours. There is no charge for inspection.

How Does State Law Apply? This warranty gives you specific legal rights, and you may also have other rights which vary from state to state.

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BOX 8.3 FULL TWO YEAR WARRANTY ON THE BLACK STAR 2001 CLOTHES WASHER This is a multiple warranty that is part full and part limited. The initial twoyear full warranty spells out that the customer has a right to a refund or a replacement. The remainder of the warranty is limited because it covers only parts and not labor.

What is Covered Any defect in your 2001 Clothes Washer.

For How Long Two years after the date you bought your 2001 Clothes Washer.

What Black Star Will Do Repair, or if repair is not possible, either replace your 2001 Clothes Washer, or refund the purchase price, whichever you prefer. LIMITED WARRANTY ON PARTS FOR THE THIRD THROUGH FIFTH YEARS

What is Covered Any defect in your 2001 Clothes Washer.

For How Long From the start of the third year after you bought your 2001 Clothes Washer until the end of the fifth year.

What Black Star Will Do Provide free new or rebuilt replacement parts, but not labor to install the parts. Any servicer you choose can do service during this period.

How to Get Service Contact any Black Star Dealer or any Authorized Black Star Service Center. See the Yellow Pages under “Appliance Repair” for the name of a Black Star Servicer near you, or call 800-1111111.

Your Rights Under State Law This warranty gives you specific legal rights, and you may also have other rights which vary from state to state.

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This part full and part limited multiple warranty is a pro rata warranty— one that provides a refund or credit that decreases during the life of the product according to a formula. Notice that the formula is carefully spelled out. The warranty specifies that during the initial period of full coverage the customer has a right to a replacement or a refund. The remainder of the warranty is limited because the customer can get only a partial credit.

BOX 8.4

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TREADWELL TIRE

Full Warranty During First 20% of Usable Tread Life If a defect in materials or workmanship appears in your Treadwell Tire before 20% of the tread is worn away, Treadwell Corporation will provide, at your choice, either free replacement of the same model number Treadwell Tire or a complete refund of the original purchase price.

Limited Warranty During Remaining 80% of Usable Tread Life If a defect in materials or workmanship appears in your Treadwell Tire after 20% of the tread is worn away and before the remainder of the tread is worn away, Treadwell Corporation will provide you with a credit good for the purchase of any Treadwell Tire of the same model number. The credit will drop by 10% of the original purchase price for each additional 10% of the tread that is worn away when the defect appears.

How to Get Service Just bring the defective tire to any Treadwell Dealer. The address of the dealer near you is listed on the other side of this document

How State Law Relates to this Warranty This warranty gives you specific legal rights, and you may also have other rights which vary from state to state.

Making Warranties Available Prior to Sale REQUIREMENT III: THE PRESALE AVAILABILITY RULE {16 C.F.R. PART 702}. Written warranties must be available for customers to read before buying. As explained, this requirement applies to warranties on products costing more than $15.

The FTC’s Rule on Pre-Sale Availability of Written Warranty Terms requires that written warranties on consumer products costing more than $15 be available to consumers before they buy. The Rule has provisions that specify what retailers, including mail order, catalog, and door-to-door sellers, must do to accomplish this. The Rule also specifies what manufacturers must do so that sellers can meet their obligations under the Rule. These provisions are explained in this section.

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What Retailers Must Do You can display warranties any way you choose, or post signs and have the warranties ready to give customers when they ask to see them. Mail order and door-to-door companies have different modes of compliance from in-store retailers.

If you sell directly to consumers who come to your place of business to buy, you must make written warranties available at the point of sale. You must do this with all written warranties on the products you sell warranties from manufacturers, as well as any written warranties you extend. The Pre-Sale Availability Rule requires that sellers make warranties readily available to prospective buyers either by displaying them in close proximity to the warranted products, or by furnishing them upon request prior to sale and posting prominent signs to let customers know that warranties can be examined upon request. The Rule does not specify any particular method for fulfilling its requirements. For example, an appliance retailer might post a refrigerator warranty on the front of the appliance, or in the freezer compartment. Or, a retailer of small products, such as watches or electric razors, might keep the warranties readily available behind the counter, or keep them indexed in a binder near the warranted products, and post signs stating their availability. Any of these methods is acceptable.

What Mail Order Companies Must Do Manufacturers must provide warranty materials to their retailers.

If you accept orders for warranted consumer products through the mail or by telephone, your catalog or other advertising must include either the warranty or a statement telling consumers how to get a copy. This information should be near the product description or clearly noted on a separate page. If you choose the latter, you must provide a page reference to the warranty statement near the product description.

What Door-to Door Sales Companies Must Do If you sell warranted products to consumers in their homes, or in some place other than your place of business, you must offer the customer copies of the written warranties before the sale is completed.

What Manufacturers Must Do If you are a manufacturer and offer written warranties, you must provide retailers of your product with the warranty materials they will need to meet their requirements as described above. There are any number of ways to do this, including providing copies of the warranty to be placed in a binder; providing warranty stickers, tags, signs, or posters; or printing the warranty on your product’s packaging.

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As long as you have provided retailers with the warranty materials they need to comply with the rule, you are not legally responsible if they fail to make your warranties available.

Advertising Warranties Deceptive warranty advertising is unlawful.

The FTC’s Guides for the Advertising of Warranties and Guarantees {16 C.FR. Part 239} can advise you on how to advertise your warranty.

The Magnuson-Moss Warranty Act does not cover the advertising of warranties. However, warranty advertising falls within the scope of the FTC Act, which generally prohibits “unfair or deceptive acts or practices in or affecting commerce.” Therefore, it is a violation of the FTC Act to advertise a warranty deceptively. To help companies understand what the law requires, the FTC has issued guidelines called the Guides for Advertising Warranties and Guarantees. To obtain a supplement to this booklet containing texts of the Magnuson-Moss Warranty Act, the related FTC Rules, and the FTC Warranty Advertising Guides, write: Federal Trade Commission, Consumer Response Center, Washington, D.C. 20580. However, the Guides do not cover every aspect of warranty advertising, and cannot substitute for consultation with your lawyer on warranty advertising matters. The Guides cover three principal topics: how to advertise a warranty that is covered by the Pre-Sale Availability Rule; how to advertise a satisfaction guarantee; and how to advertise a lifetime guarantee or warranty.

How to Advertise Warranties Covered by the Presale Availability Rule Advertisements for products covered by the Pre-Sale Availability Rule need only state that the warranty can be seen where the product is sold. {16 C.F.R. 239.2}.

In general, the Guides advise that if a print or broadcast advertisement for a consumer product mentions a warranty, and the advertised product is covered by the Pre Sale Availability Rule (i.e., the product is sold in stores for more than $15) the advertisement should inform consumers that a copy of the warranty is available to read prior to sale at the place where the product is sold. Print or broadcast advertisements that mention a warranty on any consumer product that can be purchased through the mail or by telephone should inform consumers how to get a copy of the warranty. For advertisements of consumer products costing $15 or less, the Guides do not call for the presale availability disclosure. Instead, the Guides advise that the FTC’s legal decisions and policy statements are the sole sources of guidance on how to avoid unfairness or deception in advertising warranties. Consult your attorney for assistance in researching and applying the FTC’s case decisions and policy statements.

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How to Advertise a Satisfaction Guarantee “Satisfaction” and “Money back” guarantees constitute an offer of a full refund for any reason {16 C.F.R. §239.3}.

The Guides advise that, regardless of the price of the product, advertising terms such as “satisfaction guaranteed” or “money back guarantee” should be used only if the advertiser is willing to provide full refunds to customers when, for any reason, they return the merchandise. The Guides further advise that an advertisement mentioning a satisfaction guarantee or similar offer should inform consumers of any material conditions or limitations on the offer. For example, a restriction on the offer to a specific time period, such as 30 days, is a material condition that should be disclosed.

How to Advertise a Lifetime Warranty or Guarantee Clarify what you are talking about when you advertise a lifetime warranty {16 C.F.R. §239.4}.

Lifetime warranties or guarantees can be a source of confusion for consumers. This is because it is often difficult to tell just whose life measures the period of coverage. Lifetime can be used in at least three ways. For example, a warrantor of an auto muffler may intend his lifetime warranty’s duration to be for the life of the car on which the muffler is installed. In this case, the muffler warranty would be trans-ferable to subsequent owners of the car and would remain in effect throughout the car’s useful life. Or the warrantor of the muffler might intend a lifetime warranty to last as long as the original purchaser of the muffler owns the car on which the muffler is installed. Although commonly used, this is an inaccurate application of the term lifetime. Finally, lifetime can be used to describe a warranty that lasts as long as the original purchaser of the product lives. This is probably the least common usage of the term. The Guides advise that to avoid confusing consumers about the duration of a lifetime warranty or guarantee, advertisements should tell consumers which “life” measures the warranty’s duration. In that way, consumers will know which meaning of the term lifetime is intended.

Offering Service Contracts Section 106 of the Act deals with service contracts. Service contracts, unlike warranties, are purchased separately from a product.

A service contract is an optional agreement for product service that customers sometimes buy. It provides additional protection beyond what the warranty offers on the product. Service contracts are similar to warranties in that both concern service for a product. However, there

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are differences between warranties and service contracts. Warranties come with a product and are included in the purchase price. In the language of the Act, warranties are “part of the basis of the bargain.” Service contracts, on the other hand, are agreements that are separate from the contract or sale of the product. They are separate either because they are made some time after the sale of the product, or because they cost the customer a fee beyond the purchase price of the product. The Act includes very broad provisions governing service contracts that are explained in the following sections.

Statement of Terms and Conditions Section 108(a) of the Act prohibits you from disclaiming warranties on a product if you sell a service contract on it.

If you offer a service contract, the Act requires you to list conspicuously all terms and conditions in simple and readily understood language. However, unlike warranties, service contracts are not required to be titled full or limited, or to contain the special standard disclosures. In fact, using warranty disclosures in service contracts could confuse customers about whether the agreement is a warranty or a service contract. The company that makes the service contract is responsible for ensuring that the terms and conditions are disclosed as required by law. This is not the responsibility of the seller of the service contract, unless the seller and the maker are the same company.

Disclaimer or Limitation of Implied Warranties Sellers of consumer products who make service contracts on their products are prohibited under the Act from disclaiming or limiting implied warranties. (Remember also that sellers who extend written warranties on consumer products cannot disclaim implied warranties, regardless of whether they make service contracts on their products.) However, sellers of consumer products that merely sell service contracts as agents of service contract companies and do not themselves extend written warranties can disclaim implied warranties on the products they sell.

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OFFERING SERVICE CONTRACTS

A service contract is an optional agreement for product service that customers sometimes buy. It provides additional protection beyond what the warranty offers

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on the product. Service contracts are similar to warranties in that both concern service for a product. However, there are differences between warranties and service contracts. Warranties come with a product and are included in the purchase price. In the language of the Act, warranties are “part of the basis of the bargain.” Service contracts, on the other hand, are agreements that are separate from the contract or sale of the product. They are separate either because they are made some time after the sale of the product, or because they cost the customer a fee beyond the purchase price of the product. The Act includes very broad provisions governing service contracts that are explained in the following sections.

8.5

STATEMENT OF TERMS AND CONDITIONS

If you offer a service contract, the Act requires you to list conspicuously all terms and conditions in simple and readily understood language. However, unlike warranties, service contracts are not required to be titled full or limited, or to contain the special standard disclosures. In fact, using warranty disclosures in service contracts could confuse customers about whether the agreement is a warranty or a service contract. The company that makes the service contract is responsible for ensuring that the terms and conditions are disclosed as required by law. This is not the responsibility of the seller of the service contract, unless the seller and the maker are the same company.

8.6

DISCLAIMER OR LIMITATION OF IMPLIED WARRANTIES

Sellers of consumer products who make service contracts on their products are prohibited under the Act from disclaiming or limiting implied warranties. (Remember also that sellers who extend written warranties on consumer products cannot disclaim implied warranties, regardless of whether they make service contracts on their products.) However, sellers of consumer products that merely sell service contracts as agents of service contract companies and do not themselves extend written warranties can disclaim implied warranties on the products they sell.

9 Product Marketing

In some situations it is not the actual product that gets manufacturers into trouble, but the marketing and promotional materials that accompany the product, or “defects in marketing.” Marketing defects include improper labeling of products, insufficient instructions, or the failure to warn consumers of a product’s hidden dangers. A negligent or intentional misrepresentation regarding a product may also give rise to a product liability claim. In the universal effort to make ones’ product appear to stand above all competition, companies will employ numerous marketing schemes to help draw potential buyers to their product(s). This could involve television commercials, print ads, the product’s own packaging, promotional brochures, cut sheets, internet web pages, and every other manner in which a product can be described and promoted. In our efforts to make our products appear better than the competition’s, we often tend to push the envelope in marketing and make the product appear just a little better than it really is, which can then lead to misperceptions, possible problems, and ultimately even to a product liability lawsuit. Defective marketing might involve a slight exaggeration of the product’s capability, reliability, performance characteristics, dependability, or safety, or involve deceptive markings on the products or packaging, misleading approvals, inaccurate statistical data, or improper displays of the product in use. But is not a slight exaggeration of how good a product really is, what marketing is all about? Does everyone not do that? The answer all too often is unfortunately yes, but that does not reduce the chances of being sued. The problem is that many companies lack the expertise to recognize Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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potential problems, or know where to draw the line on what they are going to say. When a company, through its sales and marketing teams, promotes the company’s products in any manner, they create an “Express Warranty” that then could become a factor in the sale of the product. One of the first mistakes companies commonly make is to promote the product’s attributes to a finite degree, such as claiming a product to be “child-proof,” “flameproof,” “waterproof,” “impact-proof,” or any other kind of “proof,” or promoting an attribute to the 100 percent level such as “100 percent safe and effective.” The problems here are that almost nothing is 100 percent. They may be 99 percent pure or 99.999 percent of a given attribute, but it is hard for anything to be 100 percent and that 1 percent unaccounted-for portion could be what leads to problems. A product could be “child resistant,” or more “water resistant” than the competition, but when the company states a product is 100 percent anything, it opens the door to accidents or failure, which can then lead to lawsuits. All any child has to do is open the lid and consume the contents of a container and the company will be liable for false and misleading advertising. Marketing departments tend not to take such concerns seriously because they are focusing on promoting the product to the ultimate degree, but companies need to review such materials and ensure that the promotion is not an exaggeration to the extent that it could come back as a liability. Take as an example Baxter v. Ford Motor Co. Ford marketed that its windshield was made of glass that would not break, fly, or shatter under the hardest impact. In this case, when the windshield shattered, causing injury, the plaintiff brought suit claiming breach of the express warranty. Ford sought to defend on the grounds that neither Ford nor any other automobile manufacturer could build a better windshield, but that was not the point of the lawsuit nor the express warranty. The trial judge excluded that testimony and entered judgment for the plaintiff. The appellate court affirmed. If the product would have been marketed as “the most impact resistant windshield,” then Ford would have had a legitimate argument and defense, because a better windshield was not available on the market, and breach of the warranty would not have become a factor nor proximately cause the plaintiff’s harm. Any other car that the plaintiff could have purchased would have caused identical harm or worse. But if the court in Baxter read the warranty to guarantee that the windshield would be truly shatterproof (rather than simply the best windshield available on the market), then the plaintiff was injured as a result of breach of the warranty. The court’s finding that the breach of an express warranty is sufficient to impose liability and the promise of safety is explicit. The defendant was responsible precisely for the harm that the plaintiff suffered because the defendant failed to meet its legal obligation. If the warranty had not been breached and the promise made by the express warranty had been fulfilled, by hypothesis, the windshield would not have shattered, and the plaintiff would not have suffered injury. In another example of alleged false advertising, nine lawsuits were filed in Los Angeles Superior Court in 2006, accusing a number of leading manufacturers of sunscreens, lotions, and sprays of deceptively promoting their products as protection from harmful sun rays. They allege that sunscreen makers have exposed millions of

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people to cancer and other dangers through false and misleading claims about their sunscreens’ effectiveness. Lawyers are seeking class action status for suits against each of the manufacturers. Ultraviolet rays are the leading cause of melanoma, a deadly form of skin cancer. The suit claims that the companies lied about their products’ effectiveness in blocking ultraviolet rays. The suit focuses on sunscreen labels that claim that sunscreen protects equally against the sun’s harmful UVA and UVB rays. “In truth, and in fact . . . as defendants knew or should have known, their skin protection products, at best, only protect the skin against harmful UVA rays with shorter wavelengths, while the skin remains exposed to harmful UVA rays with longer wavelengths that penetrate deep within the skin,” according to the suit. The suit also focuses on how long “waterproof sunscreen” remains effective in water. The suit alleges that many of the sunblocks claim to be waterproof, but are neither waterproof nor a true sunblock. Manufacturers often claim their products are waterproof, for example. “We know that no sunscreen is really waterproof.” At best, a sunscreen can be water-resistant. “There’s good data to say that sunscreens (labeled waterproof) are effective immersed for an hour or even an hour and a half but nobody is just immersed when swimming—especially not kids. They’re flailing, agitating, and splashing.” The suits claim that products specifically aimed at children, mislead parents into believing that their children are protected. “They misled . . . the general public by representing that their UVA/UVB sunblock lotion provided 45 times a child’s natural protection against both UVA and UVB rays,” according to the suit. The attorneys maintain that, in fact, the product only provides that level of protection against UVB rays. Also, “They’re not waterproof, and all the ingredients in the sunscreen will eventually dissolve in water.” Terms such as “sunblock,” “waterproof,” and “all-day protection” are regulated by the federal Food and Drug Administration. SPF designations apply only to protection from UVB rays, although sunscreen manufacturers use it to apply a similar level of UVA protection, which it does not provide, according to the suit. The FDA accepts SPF standards for UVB but there is no standard for UVA protection. As to the allegation of deception for claiming their products are waterproof, dermatologists say they have known as much for a long time. “A lot of sunscreens that claim to be waterproof really are not,” stated the medical director of the JUVA Skin and Laser Center in New York City. “They may be water-resistant, but people have to reapply sunscreen after swimming or perspiring after sports.” “Because there is not a reliable way to measure UVA rays,” he says. “It’s more important to know what’s in a sunscreen: the most important ingredients for blocking harmful rays are zinc oxide, titanium oxide, and parsol (avo-benzone). Even then, sunscreen needs to be re-applied every two or three hours and right after sweating or swimming,” he says. Dermatologists say it is best not to rely solely on sunscreen. It is also best to avoid exposure to the sun from late morning to early afternoon, and to wear hats, protective clothing, and sunglasses. According to the Skin Cancer Foundation, more than 1.5 million skin cancers are diagnosed in the United States each year. And each year more than 8000 deaths are attributed to skin cancer—more than breast, prostate, colon, and lung cancer

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combined. The impact of the alleged misleading claims on consumers could be enormous. Several epidemiological studies—reported by the International Agency for Research on Cancer, World Health Organization—have shown significantly higher risks for melanoma in users of sunscreen than in nonusers. The protective effects of sunscreen can be outweighed by overexposure based on the false assumption that sunscreens completely abolish the adverse affects of ultraviolet light. And more than $445 million of sunscreen and tanning products are sold each year. The suit seeks to stop the sunscreen manufacturers from engaging in allegedly misleading marketing practices. It also seeks to refund money it alleges was wrongfully acquired, unspecified damages for injuries suffered, and punitive damages. At the time of this writing, the case was still pending. Whether the companies ultimately win or lose the cases, the costs to defend themselves in court will be expensive, which could have been avoided had they chosen better words in their promotion. In PepsiCo, Inc., Bottled Water Marketing & Sales Practice. Litigation, F.Supp.2d___ (Jud.Pan.Mult.Lit. February 14, 2008) four individual and class action lawsuits (two in New York, one in Tennessee, and one in Texas) were filed against PepsiCo and Pepsi Bottling Group (Pepsi) arising “from allegations that Pepsi misled consumers of its Aquafina bottled water into believing that the water source of Aquafina was something different from and better than tap water.” Defense attorneys filed a motion with the Judicial Panel for Multidistrict Litigation (MDL) requesting centralization of the litigation pursuant to 28 U.S.C. § 1407 in the Southern District of New York; the motion was unopposed. (Id.) The Judicial Panel granted the motion for centralization, and agreed that the Southern District of New York was an appropriate transferee court; accordingly, it ordered the class actions pending outside that district transferred to New York. (Id., at 1 – 2). After being the brunt of an extensive public advocacy campaign, PepsiCo, Inc. has agreed to change the way it labels its Aquafina branded water to state that the product is derived from public water supplies. The leading brand of bottled water in the United States, Aquafina, is sold in bottles with labels that carry the tagline “Pure water. Perfect taste” and depict a stylized graphic of mountain caps. “Though the image implies that the source of Aquafina is mountain spring water, it actually uses tap water as its source,” said Corporate Accountability International. PepsiCo agreed to spell out “public water source” on Aquafina labels. The company released a statement that said, “If this helps clarify the fact that the water originates from public sources, then it’s a reasonable thing to do.”

9.1

DECEPTIVE ADVERTISING v. DEFECTS IN MARKETING

What we are largely addressing in this chapter is the element of defects in marketing, especially focusing on inaccurate or exaggerated claims of safety, performance, or reliability, as opposed to talking about the other elements that fall under this category, such as defects in warnings and instructions, which is addressed in a previous chapter. However there is another dimension of false advertising that is more deliberate in an

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intentional effort to mislead consumers, and that is false or deceptive marketing or advertising, use of deliberate false statements or deception in advertising, in order to gain a commercial advantage. As advertising has the potential to persuade people into commercial transactions that they might otherwise avoid, many governments around the world use regulations to control false, deceptive or misleading advertising. The Federal Trade Commission Policy Statement on Deception states (in part): Deception involves written or oral misrepresentations, or omissions of material information. Deception may also occur in other forms of conduct associated with a sales transaction. The entire advertisement, transaction, or course of dealing will be considered. The issue is whether the act or practice is likely to mislead, rather than whether it causes actual deceptions. Marketing and point-of-sales practices that are likely to mislead consumers are also deceptive. The Commission has also found deception where a sales representative misrepresented the purpose of the initial contact with customers. When a product is sold, there is an implied representation that the product is fit for the purposes for which it is sold. When it is not, deception occurs. There may be a concern about the way a product or service is marketed, such as where inaccurate or incomplete information is provided. A failure to perform services promised under a warranty or by contract can also be deceptive. The Commission will find an act or practice deceptive if there is a misrepresentation, omission, or other practice that misleads the consumer acting reasonably in the circumstances, to the consumer’s detriment. The Commission will not generally require extrinsic evidence concerning the representations understood by reasonable consumers or the materiality of a challenged claim, but in some instances extrinsic evidence will be necessary. The Commission intends to enforce the FTC Act vigorously. We will investigate, and prosecute where appropriate, acts or practices that are deceptive.

10 Contracts, Purchase Orders, and Agreements As we focus on Product Liability Prevention we typically think about the design and function of our product, but another area we need to focus on is the potential liability we can be exposed to through the negligent actions of others. The materials and components being supplied to us from various suppliers, subassemblies from subcontractors, even the actions of installers, field service personnel, dealers and distributors, and many others can ultimately be the source of a defective condition that leads to a product liability lawsuit. So, in addition to improving our designs, warnings, and instructions, we also need to protect our interests through well written contracts and agreements. The area of contracts and agreements is normally a legal area, either covered by the in-house Legal Department or outside attorneys working on behalf of the corporation. Nonetheless, it is beneficial for the management team and drivers of this focus area to be cognizant of what needs to be in place to help ensure the company is adequately protected in all of its dealings with outside entities. When it comes to all the different types of contracts that could be in existence within a corporation—customer contracts, purchase orders, supplier agreements, representative agreements, installation and service agreements—a question sometimes surfaces as to “Who is really in charge of controlling all of them?” In a small percentage of the cases, and if the company is large enough, there may be a legal department and hopefully they are controlling all the related documents. However, in most situations there is no legal department and there may be a multitude of individuals involved in generating and receiving contracts and agreements, with no central authority monitoring the activity nor the content. Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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10.1 LACK OF SUPPLIER CONTROL Suppliers can get Original Equipment Manufacturers (OEM) manufacturers, marketers, importers, and everyone else involved with a product into as much trouble as can the primary manufacturer especially in recent years, when suppliers are often located overseas or in Third World countries. When qualifying a new potential supplier of component parts or materials most major manufacturing companies will evaluate the supplier in a number of different areas, including manufacturing capability, price, customer service, assured delivery performance, and quality control. The evaluation may even involve an onsite inspection, or multiday inspection of the supplier’s operation. This would be in the best of conditions. In other situations the buyer may do little more than ensure the supplier is capable of supplying the product required, that the price is within budget, and the turnaround time falls within the desired timeframe. In neither situation does the purchasing company typically investigate whether the potential supplier carries product liability insurance, but instead assumes that if they are in business and have been for years, they logically have such insurance. Surprisingly, a study conducted in 2002 found that only 72 percent of small companies (with up to 250 employees) actually carried product liability insurance. A company with 250 employees is no small company and could be supplying tens of millions of dollars worth of product, and yet no one ever bothered to ask if they even had insurance. Such companies may not have originally pursued product liability insurance because they feared it would be cost prohibitive, they did not know where to purchase it from, or they grew to feel there was no need for it because they had never experienced a problem. Then, at some later date, they make a design error or manufacture products with a defective condition and are hit by one or more product liability lawsuits, and go out of business. Within some supplier qualification agreement the purchasing company needs to include a clause similar to the one shown below: Insurance Seller represents, and Buyer relies upon the representation that Seller currently maintains product liability insurance in the amount of $2 million for each claim which may arise in connection with Products supplied by Seller to Buyer. Such policy or policies of insurance shall be maintained in full force and effect at the sole cost and expense of Seller throughout the term of this agreement. Seller shall furnish to Buyer a certificate or certificates of insurance evidencing such insurance and naming Buyer as an additional insured and providing that Buyer shall receive 90 days prior written notice by the insurance carrier(s) of any change, cancellation or reduction in such coverage. Seller shall maintain the insurance coverage specified in this Subsection for 2 years after the date of termination of this agreement for any cause.

Another error in judgment purchasing entities make is to specify the product they want from the supplier, but fail to inspect, test, or monitor that such specifications are continuously being adhered to. Then, at some later date it is found that the

10.2

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supplier deviated from the original specification, failed to notify the purchaser of any deviation, and the condition continues until it is eventually discovered by the purchasing company or as a result of some sort of field failure or incident. Then, when the defective condition is identified, it may result in a massive recall or worse, and it is discovered at this point that the supplier is not insured or capable of standing behind the expense of recalling their product. 10.2 GUILTY BY ASSOCIATION Dealers and distributors of products alleged to be defective or unsafe for the marketplace can also be dragged into a product liability lawsuit, either through their own negligent actions or as codefendants in a case brought against the manufacturer. Plaintiffs will look for every opportunity to bring additional parties into a product liability lawsuit, hopefully giving them the opportunity of settling with more than one company. Just as the manufacturer needs to ensure they are covering all their bases in an effort to reduce their exposure to lawsuits, so must the dealers and distributors of these same products. Recognizing in all probability they had nothing to do with the design and manufacture of a product, the dealers or distributors should strive to limit their exposure to any defective conditions or negligence on the part of the manufacturer. This needs to be addressed through signed contractual agreements, ensuring there are indemnification clauses between them and the manufacturers for whom they sell. The following would be a typical passage: (Manufacturer) shall indemnify and save harmless Dealer or Distributor from any and all claims, liability, loss or expense, including reasonable attorneys’ fees and costs, arising out of or relating to (1) claims of third parties for loss, damage, or injury to person or property resulting from the negligence, defects in design or manufacture, breach of contract, or misconduct of (Manufacturer); or (2) fines, impositions or penalties assessed by any governmental entity or official arising out of or relating to any product defects, breach of contract, or improper or unlawful conduct on the part of (Manufacturer) or its agents or employees.

The dealer or distributor may also request that the manufacturer include the dealer or distributor as an “also insured” in the manufacturer’s own liability insurance policy, which would typically come at no additional cost to the manufacturer, but would enable the dealer or distributor to go direct to the manufacturer’s insurance agent to enforce the indemnification clause in the event of a product liability lawsuit in which the dealer or distributor had no role or responsibility, but may have automatically been named as a codefendant. In addition to this clause the contract or agreement should include a second clause indemnifying the manufacturer from negligent actions on the part of the dealer or distributor: Dealer or Distributor shall indemnify and save harmless (Manufacturer) from any and all claims, liability, loss or expense, including reasonable attorneys’ fees and costs, arising

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out of or relating to (1) claims of third parties for loss, damage, or injury to person or property resulting from the negligence, breach of contract, or misconduct of Dealer or Distributor; or (2) fines, impositions, or penalties assessed by any governmental entity or official arising out of or relating to any breach of contract or improper or unlawful conduct on the part of Dealer or Distributor or its agents or employees.

In this manner both parties, the manufacturer as well as the dealer or distributor, are protected against the negligent acts or possible liabilities created by the other party.

10.3 PURCHASE ORDERS The company purchase order is a vital contract between the organization and its suppliers and subcontractors. In many cases, it is also the only legal contract bonding the two companies. How the purchase orders are distributed, what specifications they need to include, what terms and conditions need to be spelled out, and what other materials need to be sent along with them should be reviewed by the corporate administrative team and incorporated into procedures. It is surprising how many companies do not pay any attention to the fine print of their own purchase orders, until they become involved in a products liability action. Companies that fully expect to be indemnified by their suppliers in the event of a product liability lawsuit but never said as much on their purchase order, or they expect subrogation in the event of an insurance claim, but have no such requirement stated anywhere. And regardless of customer goodwill, it will be the corporation’s insurance company that will be paying the bill in the event of an insurance claim or products liability action. So unless there is a contractual agreement for a company to indemnify their customers, the insurance company is not likely to honor a customer goodwill request. Both suppliers and customers need to pay special attention to what their contracts are stipulating. I have seen where manufacturers produced large numbers of electrical commercial products for a customer, then one of them allegedly started a fire, which led to a significant insurance claim. The customer quickly told the supplier (the manufacturer) that they fully expected the manufacturer to get them out of the case and indemnify them, which the manufacturer fully wanted to do; however, there was no contractual agreement requiring it, so the (manufacturer’s) insurance carrier refused. This created a real problem for the manufacturer and their relationship with this significant customer. The customer instantly generated a new contract stating that the manufacturer would be required to indemnify and hold the customer harmless in the event of any future incident. I also worked with a manufacturing corporation that had eight plants, with eight separate purchasing departments, and found they had six different sets of Terms & Conditions (T&Cs) on their purchase orders. No one knew what the other plants were using, and no one knew where their versions had originated, they had just always been there. The variations went from one extreme, of there not being any terms and conditions, to limited T&Cs that dealt with shipment requirements and payments, to one plant that had everything it should have.

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The following are some typical “Indemnification” clauses for suppliers, which can also include language pertaining to patent infringement or environmental contamination, in the event either would be relevant. Indemnification Vendor shall indemnify and hold Purchaser, any subsidiary of Purchaser, and any successors, assigns, or customers of Purchaser harmless from and against any and all costs, expenses (including but not limited to attorneys’ fees and expenses), liability, proceedings, damages and losses for or on account of, arising out of, or incurred in connection with, the sale, use or alleged use of any component, product, or process furnished by or on behalf of Vendor under this Order which is alleged to have malfunctioned, or deemed defective resulting in an accident, injury, or death. Where product is found to have infringed on any existing patent, Vendor shall pay all royalties and license fees required for the continued sales or use of any such patented or unpatented invention, article or process, as well as to hold the Purchaser harmless against any legal fees, damages, or losses. In the event a suit brought on account of an alleged infringement or any United States patent by any material supplied or work performed by Vendor results from designs or specifications furnished by Purchaser or on behalf of Purchaser (which are not otherwise used or manufactured by Vendor or patents for which are not controlled by Vendor). Purchaser shall indemnify Vendor, except as hereinafter provided; from and against any and all damages, costs and expenses, including reasonable attorneys’ fees and expenses, which may be rendered against or incurred by Vendor upon final judgment in any suit brought on account of the alleged infringement of any United States patent by such material or work. Prompt written notice shall be given to the party from whom indemnity is sought of the bringing of the suit and such party shall be given the opportunity to settle or defend it as such party may see fit and every reasonable assistance in settling it or defending it shall be rendered by the party seeking the indemnity. Purchaser shall in no event be liable to the Vendor for special, direct, indirect, incidental, or consequential damages arising out of or resulting from infringement of patents. Indemnification Seller shall indemnify, hold harmless, and at Buyer’s request, defend Buyer, its officers, directors, customers, agents, and employees, against all claims, liabilities, damages, losses and expenses, including attorneys’ fees and cost of suit arising out of or in any way connected with the Goods or Services provided under this Agreement, including, without limitation, (i) any claim based on the death or bodily injury to any person, destruction or damage to property, or contamination of the environment and any associated clean up costs, (ii) Seller failing to satisfy the Internal Revenue Service’s guidelines for an independent contractor, (iii) any claim based on the negligence, omissions, or willful misconduct of Seller or any Seller’s Assistants, and (iv) any claim by a third party against Buyer alleging that the Goods or Services, the results of such Services, or any other products or processes provided under this Agreement, infringe a patent, copyright, trademark, trade secret, or other proprietary right of a third party, whether such are provided alone or in combination with other products, software or processes. Seller shall not settle any such suit or claim without Buyer’s prior written approval. Seller agrees to pay or reimburse all costs that may be incurred by Buyer in enforcing this indemnity, including attorneys’ fees.

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10.4 RECALL CONSIDERATIONS Another area of consideration regarding terms and conditions may be that of having to initiate a possible recall of a supplied product found to be defective. In some cases the buyer might represent a company larger than the seller, and in the event of a recall may be more organized or have more resources and capabilities than that of the seller, and/or be less reluctant to initiate a recall than the seller, but fully expects to be reimbursed for any and all expenses associated with recalling the product because of a defective condition brought on by the supplier. Therefore the terms and conditions might also include a clause similar to the following: Recall Buyer reserves the right to initiate a recall of any products supplied pursuant to this agreement which are defectively designed or manufactured or contain defective warnings or instructions and/or which fail to comply with all applicable federal, state or local laws, rules, or regulations. Provided that Buyer gives Seller timely notice of any such recall action, Seller agrees to reimburse Buyer for all costs incurred in connection with such recall, including, but not limited to, the costs of notice and replacement of all defective products. Recall costs shall include the cost of replacing or repairing the defective product, including all costs of removal and reinstallation of the defective products.

10.5 DISTRIBUTION OF THE PURCHASE ORDER TERMS AND CONDITIONS The next area of concern deals with the actual distribution of the purchase orders and the related terms and conditions. Many company purchase order forms have the terms and conditions, which contain the indemnification clause, stated on the back of the form, commonly in very small lighter colored print. Another practice may be to have the terms and conditions printed on a separate document that is then supplied to the supplier. For companies that have the terms and conditions printed on the back of the original purchase order the concern then focuses on the actual procedure that is followed by the purchasing department. For instance, in some situations it may be found that the purchasing agent is placing calls to the supplier, identifying what they want to purchase, quantity, and date required, and then merely giving the supplier the purchase order number for reference. The actual purchase order is just kept internally, and once the invoice is received from the supplier the purchasing department attaches the original purchase order to the invoice and forwards them to Accounts Payable for processing and payment. The supplier never actually receives the purchase order, nor the terms and conditions written on the back. In another scenario, the purchasing agent calls the supplier to order the parts or material, and then follows up the verbal discussion by faxing the purchase order to the supplier. In this situation the front of the purchase order is faxed and received

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CUSTOMER CONTRACTS

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by the supplier, but the backside with the terms and conditions is not faxed, nor would it probably be legible even if it was, because of the small lighter colored font. In still other cases the purchasing department might send a supplier a set of terms and conditions when the relationship is first established, and afterward would just continue to send new purchase orders without any terms and conditions, knowing that they were furnished to the supplier at some initial point. A problem can arise if there is no signed acknowledgement that the supplier actually received the terms and conditions from the purchasing company. All of these scenarios potentially create problems in the event of a product liability lawsuit, as the purchasing company tries to enforce the terms of their indemnification clause, and the supplying company, along with their insurance company and possibly attorneys representing them, deny ever receiving any such terms and conditions.

10.6 CUSTOMER CONTRACTS Manufacturers must also review contractual agreements being handed to them by the customer, as part of any production order. Manufacturers will commonly assume they cannot challenge the terms of a customer contract, but that is not always the case. Customers will typically demand the world as part of any Request for Quote (RFQ) or production order, but the supplier may find that there is room to negotiate. In some instances the customer may be many times larger than the supplier/manufacturer, which could mean an in-house legal department generated a well written protective contract, all to the customer’s advantage. Customers may not only require indemnification for them for any product supplied, but may also go so far as to require protection for all their distributors and agents, regardless of whether those same parties may have contributed in any way to the claim or accident. One such customer ordered a high volume of commercial advertising products from a client, electrical in nature, quantities of which the customer would then have the client ship to a list of its distributors. The customer’s distributors would then install the products in numerous retail establishments. In the event there was ever any type of failure that resulted in a fire, or personal injury, the customer required indemnification not only for themselves, but for all their distributors. Yet it was the distributors that were going to handle the installations, which usually involved the addition of long electrical cords, which they made on location, and it was known that the distributors had the practice of stapling the cords to walls and beams to keep them out of the way of patrons. I advised my client to accept the indemnification of the primary customer, who merely served as the purchasing agent, but not to indemnify the distributors. Figure 10.1 shows a contract review procedure with Product Safety & Liability Prevention (PSLP) built in. Another issue that falls under this category is when a customer designs and engineers a product, and hires a manufacturer to build and supply the product to them. The subcontractor may not have any knowledge of the customer’s expertise in this product area, may not have any knowledge of whether the customer performed any hazards

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Figure 10.1 Contact review procedure.

analysis/risk assessment of the design, may not even know if the customer tested and validated the design concept, but knows that the customer is supplying them with a purchase order to build the product, or a component part of the final product. This is especially the case for automotive suppliers; they are furnished with a specification for a component part or subassembly, and they are to supply it to the automaker.

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In that situation one can assume the customer has a lot of expertise supporting their design concept, although that is not always the case. However when it comes to the huge number of other companies that will design and engineer a product or component for someone else to build and supply, the amount of engineering expertise and product knowledge the customer may have can vary greatly. The logical response would be “This is what they told us to build for them, so we complied with their order.” At face value it would all seem to be the responsibility of the customer, but that might not always end up being the case. In all likelihood the only indemnification agreement will be on the customer’s purchase order, protecting them from the supplier’s manufacturing defects, but what about design defects? If it is found in litigation that the company whose name is shown on the product is really not the manufacturer of the product, the supplier or subcontractor could be named as a codefendant in the case. The fact that a supplier or subcontractor has the ability and expertise to build such a product might make them appear as more of a product expert than the customer that designed it, and they share a responsibility to evaluate the design and address areas of concern with the customer, as opposed to just blindly producing whatever the customer is ordering. This creates a need for there to be an agreement between the two parties, with the supplier/subcontractor agreeing to indemnify the customer for any manufacturing defects, and the customer indemnifying the supplier/subcontractor for any defects in design.

10.7 THE CHINA SYNDROME In the fall and winter of 2007 there was a substantial amount of worldwide press regarding the problems with products coming out of China, and the record-setting recalls of children’s toys and other consumer goods. This brings to light problems associated with the pursuit of Third World suppliers and their associated economies. Purchasing products or materials from suppliers in places like China, Vietnam, or India is not the equivalent of doing business with suppliers in places like Europe and Canada. If their products prove to be defective and require being recalled or result in personal injury and lawsuits, the company that brought the products into the United States will bear all the costs and liabilities, regardless of any contractual agreements that may have been written. The only protection an importer can try to secure is requiring that the Third World supplier have insurance with a U.S. international insurance company, and ensure that the U.S. company is included in the policy. One company that will provide insurance to manufacturers in China and India, or provide U.S. companies insurance coverage for their overseas suppliers, is AIG. Chubb also has offices in places like China, and Marsh (an insurance broker) has offices in China as well. Beyond that, my advice would be “If you’re going to buy products from Third World companies, you better have a presence in their manufacturing plant(s) to absolutely assure the product is being made to your exact specifications, or have a U.S. owned third party checking the products before they leave the plant(s).”

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10.8 RESTRUCTURING IMPORT CONTRACTS WHEN IMPORTING GOODS FROM CHINA1 “Chinese Tires Recalled” “Chinese Toy Scare” “More Deaths from Pet Food Likely.” These troubling headlines, which are invariably succeeded by lawsuits, allege defects associated with the domestic sales of products manufactured in China. Not surprisingly, plaintiffs are not suing the Chinese manufacturers, but rather the U.S. importers and distributors. Also, because the National Highway Traffic Safety Administration (NHTSA), the Food and Drug Administration (FDA), and the Consumer Product Safety Commission (CPSC) lack the authority to force Chinese companies to recall such products, the recall burden falls squarely on U.S. companies. Small importers like Foreign Tire Sales, instructed to recall around 450,000 tires, found themselves facing bankruptcy with little available legal recourse against the Chinese manufacturer. Perhaps more significantly, liability in ensuing suits and the costly legal expenses of defending these suits are falling squarely on the U.S. sellers and distributors of allegedly defective Chinese products. For example, a class action suit was filed in the Northern District of Illinois against Learning Curve Brands because toys that the company distributed had been imported from China and were made with lead paint. What lessons can be learned from this fallout, and what preventative steps should be taken when dealing with Chinese companies?

10.8.1

General Contract Considerations

There are a myriad of options for companies looking to insulate themselves contractually to avoid unintentionally assuming the entire risk in a transaction, yet not all options offer equal protection. American companies can include in their contracts risk-shifting provisions by which the Chinese manufacturer agrees to indemnify or buy back defective products, but such provisions still require the ability to enforce the contract against a Chinese manufacturer, which often proves problematic. Moreover, the Chinese judicial system will generally not enforce American judgments, especially default judgments. As an alternative, American companies may consider assuming more control in the production process, rather than less, by reserving the right to conduct quality control visits and audits. For companies that are still disinclined to become involved in the manufacturing process, one solution may be to seek safe harbor in a third party by, for example, requiring an irrevocable letter of credit from a mutually-agreed-upon bank. An importing company may structure its letter of credit such that the products must be shipped and inspected prior to issuance of any payment. This solution, while adding some protection, still may not insure against a large-scale product recall due to a defect not discoverable upon initial inspection.

1

Andre Hendrick, Kelli Smith Lott– Holland & Knight.

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10.8.2

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Insurance Options

A better approach for U.S. companies is to require their Chinese suppliers to obtain and maintain product liability insurance. There are different types of insurance that companies may consider in addition to their commercial general liability policies, which usually do not cover the costs associated with a product recall. Separate recall insurance, which generally covers the cost of informing the public of the recall, the cost of having the product recalled, overtime expenses for employees due to the recall, and the cost of hiring additional help, has been available in the food and cosmetic industries for years, and is now being offered in the automotive and original equipment manufacturing markets. Additionally, extra coverage can be purchased to cover other recall costs, such as storing and/or disposing of defective goods. Language can also be added to a policy to cover business operation losses, that is, the costs associated with shifting resources away from normal, productive business operations toward the recall. Another related option is for U.S. companies to contractually require Chinese manufacturers to carry their own recall insurance and include the U.S. company as an additional insured. Due to recent events, several international underwriters, including AIG/AIU, have dedicated significant resources to developing and marketing products to meet the needs of international businesses.

10.8.3

Arbitration Clauses

Even with insurance protection, given that the Chinese courts steadfastly refuse to honor judgments obtained in U.S. courts, U.S. companies may also consider incorporating a specialized arbitration clause into contracts with foreign suppliers. When dealing with Chinese exporters, great care must be taken in the crafting of these clauses. For example, in Guanghope v. Mirant, the Chinese Supreme People’s Court found that an arbitration clause was invalid because the parties had not expressly identified an “arbitral commission.” Thus, the arbitration provision must be clear, unambiguous, and must specifically and accurately identify the presiding arbitral body. Based on this and other recent decisions, it seems clear that the standard arbitration clause will not be effective. There are two viable options for obtaining an arbitration award that would be enforceable in China, both having their share of benefits and shortcomings. The first option is arbitrating pursuant to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly called the New York Convention, to which China is a signatory. Article 3 of the Convention states that “[e]ach contracting State shall recognize arbitral awards as binding and enforce them in accordance with the rules of procedure of the territory where the award is relied upon . . .” Theoretically, an arbitral award rendered in any of the more than 130 signatory states must be recognized and enforced by other participating states. Although London, Paris, and Geneva are some of the more popular venues, Stockholm remains China’s favored neutral venue because of its longstanding tradition favoring arbitration over litigation.

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Once a company has received an arbitral award from a signatory state, it must follow the enforcement guidelines set out by China’s Civil Procedure Law. First, it must apply to the Intermediate People’s Court to have the judgment recognized and enforced. After receiving the application, the Intermediate People’s Court is required to perform a thorough review and is obligated to recognize and enforce the judgment. However, the award can be challenged on procedural grounds, such as the validity of the arbitration clause, the lack of fair opportunity to be heard, and the sufficiency of notice. There is a significant loophole in both the New York Convention and China Procedural Law. Article V(2)(b) of the Convention and Article 260 of China’s Civil Procedure Law allow Chinese courts to refuse to enforce a judgment based on the “public policy of the forum.” Chinese courts have historically interpreted this language very broadly and have allegedly succumbed to pressure exerted on them by local communities, governmental bodies, and local businesses. In the hopes of removing local influence, recent Chinese procedural amendments now require the approval of the Supreme People’s Court, China’s highest court, to refuse enforcement of a foreign arbitral award. The second option for enforceable arbitration is the China International Economic and Trade Arbitration Committee (CIETAC). Established in 1956 and originally named the Foreign Trade Commission, CIETAC includes over 1000 arbitrators, approximately 25 percent of which are nonresidents of mainland China. CIETAC now handles more international arbitration cases than any other arbitral body. Additionally, CIETAC has made strides to become more flexible, offering many contractual options to the parties. CIETAC is also speedy, averaging just eight months before awards are issued, and inexpensive, offering fees that are relatively low compared to other arbitration institutions. It also now offers mediation-arbitration (MEDARB) as an alternative to straight arbitration. Foreign parties should be extremely careful to ensure its enforceability when drafting a CIETAC arbitration clause. If the clause states that disputes may be submitted either to an arbitration commission or to litigation, or if it only gives one party the right to choose arbitration, Chinese courts will deem it invalid. Additionally, there are certain requirements that, if omitted, will void an arbitration clause. Most importantly, an arbitration clause must state that all disputes will be submitted to CIETAC. Additionally, the arbitration clause should include the arbitration’s venue, the language to be used during the arbitration, the number of arbitrators, and the nationality of the presiding arbitrator. Although Article 31 of the CIETAC Arbitration Rules provides that the parties can agree on the place of arbitration, it is unclear whether that extends outside of mainland China. To date, there have been a few CIETAC arbitrations held in Hong Kong. Parties can also agree on the language for the arbitration, but in the absence of a written agreement, the default language is Mandarin Chinese. Likewise, if the parties do not agree on the nationality of the presiding arbitrator, he or she will be selected by CIETAC and will most likely be Chinese. Recent changes to CIETAC’s rules have centered around flexibility and the parties’ freedom to contract, but a poorly drafted arbitration clause can have disastrous results for a U.S. company.

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Despite these positive changes, CIETAC still has a reputation for being slow and for offering fees so low that many foreign arbitrators are unwilling to serve. Furthermore, even when foreign companies have used CIETAC to arbitrate their disputes, there have still been enforcement problems. As stated above, Article 260 of the Chinese Civil Procedure Law allows the courts to refuse to enforce a judgment or award if it would be detrimental to the social or public interests of the community. Insolvency has also proved to be a major roadblock to enforcement, accounting for 43 percent of all cases where judgments were not enforced in China. Banks have allegedly compounded the problem by ignoring judicial orders to freeze a defendant’s assets, making it impossible to collect a judgment. Although there are uncertainties when dealing with a Chinese manufacturer, one thing has become clear: the process has become more expensive. As ostensible manufacturers, U.S. companies cannot shift liability to the Chinese manufacturer despite a low level of involvement, lack of control over the Chinese company, or a total lack of negligence on their part. Buying from a manufacturer that has American assets, a letter of credit, or its own product liability insurance will increase the chances of collecting on a judgment in the event of a manufacturing defect. However, U.S. companies dealing with Chinese manufacturers are still best protected by having their own insurance policy and by including a carefully drafted arbitration clause. 10.8.4 Indemnity and Insurance Issues Concerning Foreign Manufacturers2 Sellers must manage products liability exposure, as potential exposure always exists. An increase in recalls of foreign-made products has caused Congress to reevaluate the governmental regulations and industry standards promulgated to ensure product safety and quality. Sellers face exposure from products liability litigation and become the primary target in lawsuits when manufacturers have limited financial and insurance resources, are beyond the jurisdiction of U.S. courts, are insolvent, or simply out of business. Companies cannot rely upon state common law indemnity provisions to adequately protect their interests. Lawyers need to understand their clients’ global business strategies, as these issues are gaining significance as companies engage in global sourcing. 10.8.5

Managing Products Liability Exposure for Foreign Products

The collaborative efforts of the CPSC and foreign compliance agencies may lead to the creation of enforcement agencies with more global reach. For now, as domestic companies partner with foreign manufacturers to supply consumer goods in the United States, foreign manufacturers are often beyond the reach of the U.S. compliance agencies and the judicial system. Therefore, consumers and the courts often hold the domestic importer, distributor, or retailer solely accountable for the quality and safety of consumer goods. 2

Veronica Hayes Gromada, Wal-Mart Stores Inc, & Michael G. Jones, Martin Pringle Oliver Wallace & Bauer LLP.

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Although many corporate business dealings end with indemnity and insurance considerations, when dealing with foreign suppliers these issues should be addressed during early negotiations. Once safety or quality issues are raised, consumers, governmental agencies, and courts will look to domestic sellers and retailers rather than foreign manufacturers for answers. Sellers must be prepared to defend against complex products liability litigation while trying to promote sound business practices and sustain relationships with their suppliers. 10.8.6 Key Contractual Issues when Dealing with Foreign Manufacturers As more retailers engage in direct sourcing, lawyers must devise methods of ensuring supplier and manufacturer accountability while limiting exposure to their domestic clients. Contracts between domestic sellers and foreign manufacturers must address the same rights, duties, and obligations normally contained in contracts between two domestic companies, but require additional provisions to ensure adequate indemnity and insurance provisions are in place. 10.8.7 Wal-Mart Stores, Inc. & National Union Fire Insurance Co. of Pittsburgh v. RLI Insurance Co.—Strengthening Insurance Rights Through Vendor-Indemnity Agreements Wal-Mart Stores, Inc. & National Union Fire Insurance Co. of Pittsburgh Pa. v. RLI Insurance Co., 292 F.3d 583 (8th Cir. 2002) is a seminal case on this topic. The case involved the interpretation of multiple insurance contracts and an indemnity provision in a vendor agreement between Wal-Mart and a lamp supplier, Cheyenne. The underlying case involved a fire allegedly caused by a lamp Cheyenne supplied to Wal-Mart. The defendants settled with plaintiff for $11 million, but Wal-Mart and certain primary and excess insurance carriers disagreed over their obligations with respect to the settlement. St. Paul paid the first $1 million of the settlement and RLI, Cheyenne’s excess carrier, paid the remaining $10 million. RLI sought reimbursement from Wal-Mart and National Union, the insurer from which Wal-Mart obtained its own policy. Wal-Mart and National brought a declaratory action to settle the dispute. The district court ordered Wal-Mart and National to reimburse RLI. The district court’s decision turned on its interpretation of the “other insurance” clause in RLI’s policy: Whenever the insured is covered by other primary, excess, or excess-contingent insurance not scheduled on this policy as scheduled underlying insurance this policy shall apply only in excess of, and will not contribute with, such other insurance. This policy shall not be subject to the terms, conditions or limitations of any such other insurance. In the event of payment under this policy where the insured is covered by such other insurance, we shall be subrogated to all of the insured’s rights of recovery against such other insurance. Id. at 588.

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Upon reviewing the RLI policy, the district court ruled in RLI’s favor on two bases: (1) the language of the insurance policies governed the allocation of liability for the settlement, not the indemnity provision of the vendor agreement; and (2) the National policy was underlying insurance and must be exhausted before RLI would be obligated as an excess carrier. Id. 585. Wal-Mart and National appealed, arguing that the district court’s decision made Wal-Mart, an insured, liable to its insurer, RLI, for a covered loss in violation of an axiomatic insurance principle. Id. at 585. They also argued that the decision would result in circular litigation; RLI would ultimately be held responsible for the entire settlement because of Cheyenne’s indemnity obligation. Id. at 585 and 587. Finally, appellants argued that the court should attribute all fault for purposes of the settlement to Cheyenne. The court ruled for appellants and overturned the district court’s ruling. The appellate court’s analysis follows. Under the vendor agreement, Cheyenne agreed to indemnify Wal-Mart for claims arising out of the sale of Cheyenne’s products, lamps. The vendor agreement included two broad indemnity clauses: [Cheyenne] shall protect, defend, hold harmless, and indemnify [Wal-Mart] from and against any and all claims [and] actions or arising out of any actual or alleged death or of injury to any person or other damage or loss, by whomsoever suffered, resulting or claimed to result in whole or in part from any actual or alleged defect in such merchandise. Indemnification; [Cheyenne] agrees to save [Wal-Mart] harmless and indemnified from all claims, liability, loss, damage, and expense, including reasonable attorneys’ fees, sustained from the purchase, use, or sale of any goods or from the breach of any of the guaranties or warranties hereunder and such obligations shall survive acceptance of the goods and payments therefore by [Wal-Mart].

Cheyenne also agreed to provide $2 million in insurance coverage. To fulfill its insurance obligation Cheyenne obtained a $1 million policy from St. Paul and obtained excess coverage from RLI. These provisions convinced the court that Cheyenne intended to fulfill its indemnity obligation to Wal-Mart, in part, by obtaining the RLI policy. The parties’ intentions were clear and did not unfairly prejudice the insurer. The court determined that any judgment against Wal-Mart to pay the settlement would be “liability to Wal-Mart resulting from its sale of Cheyenne’s goods,” the very circumstance for which the indemnity provision was intended. Further, “to apply the other insurance’ provisions to reduce [the indemnitor’s insurer’s liability] would serve to abrogate the indemnity agreement.”3 The Wal-Mart court also rejected RLI’s argument that the indemnity clause was not intended “to cover Wal-Mart’s own negligence because such an obligation is not clearly and unequivocally expressed as required by Arkansas law.” The court 3 Citing J. Walters Constr. Inc. v. Gilman Paper Co., 620 So. 2d 219 (Fla. App. 1993) and Aetna Ins. Co. v. Fld. & Cas. Co. of N.Y., 483F.2d 471, 473 (5th Cir. 1973) (indemnity agreement “controls all the rights and obligations of the parties and their privies (the insurers)”).

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was not persuaded as the indemnity provisions were very broad and stated that Cheyenne would indemnify Wal-Mart for claims resulting “in whole or in part” from an actual or alleged defect. The settlement met this criterion because plaintiffs alleged that “design flaws in the lamp resulted in its explosion.” Under these facts, “[a]ny possible negligence by Wal-Mart d[id] not protect Cheyenne from its contractual obligation to indemnify Wal-Mart.” Wal-Mart has been followed by courts across the country. In Lloyds, indemnitor’s insurer tried a rather novel approach. It argued, in part, that the indemnitee’s insurer should share the defense costs because the insured contract provisions of indemnity policy did not insure the indemnitor against its indemnity obligation to reimburse the indemnitee for attorneys’ fees and expenses. The Lloyd court unequivocally rejected this proposition. Even if one assumes that attorneys’ fees and costs for defending the underlying suit were not covered, the indemnitor’s insurer would not be entitled to recover those fees from the indemnitee or its insurer.4 In Federal, the indemnitor agreed to indemnify the indemnitee unless the alleged injury was caused by the “sole negligence” of the indemnitee. Upon settling the claim, the insurer for the indemnitor argued that the indemnitee’s insurer should contribute to the settlement because the incident could have been caused, in part, by actions of the indemnitee. The court looked not only to the indemnity agreement, but also to the pleadings, to determine whether the indemnitee’s insurer was obligated to contribute. In doing so the court determined that, “[a]lthough sole negligence is ordinarily a question of fact, it ‘may be determined as a matter of law when the evidence is so clear and undisputed that reasonable persons could not disagree.’ ” Upon reviewing the evidence, the indemnitor’s insurer could not establish a right to contribution for alleging that the indemnitee was the “sole cause” of the loss. The Federal indemnitor-insurer also argued that the indemnitee waived its right to indemnification by executing the settlement agreement and full and general release in the underlying lawsuit. The indemnitor-insurer claimed that the indemnitee-insurer had released the indemnitor from any causes of action for indemnity. This argument had no merit as the parties explicitly agreed that the settlement agreement would not constitute a waiver of their rights and defenses against each other. The agreement read, in pertinent part, “It is the intention of [indemnitorinsurer] and [indemnitee-insurer], with respect to any such claims, causes of action, or action against each other, to preserve all rights and/or defenses available under their respective insurance policies as of the time of the execution of this Agreement, and nothing contained herein should be construed as a waiver of any such rights and/or defenses as against each other.” The indemnitee preserved its right of contribution on the basis of the indemnity agreement by incorporating this language into the settlement agreement.

4

Lloyds, 335 F.3d at 443.

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10.8.8 Creating Iron-Clad Indemnity and Insurance Agreements—Managing Industry Risks By applying the principles in Wal-Mart and related case law, attorneys can solidify an insurer’s obligation to provide coverage when the indemnitor-foreign-manufacturer is out of legal reach. Negotiation points should clearly define each party’s role regarding the products, provide written assurances (warranties) that the manufacturer will stand by its product, and provide for contractual protection against litigation and catastrophic losses. Consider the following checklist when drafting indemnity and insurance agreements: † † † † †

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†

Stateside execution of contracts and agreements Pre- and postproduction stateside testing Submission to jurisdiction within the United States Defined roles of parties with respect to business relationship Making business contract voidable upon breach of manufacturer’s indemnity and insurance obligations Disclosure of subcontractors and component part suppliers Warranty of compliance with CPSC, FDA, ANSI, or any applicable agency Execution of the agreement in English with the English version controlling Execution by a high-ranking officer for the manufacturer, preferable in the United States Proof of solvency A plan of action for product returns, withdrawals, and/or recalls insurance Coverage for product and nonproduct allegations indemnity even when claims and/or lawsuit fraudulent and despite allegations of independent negligence Stateside insurance coverage, third party administrator (additional insured status) Continued indemnity and insurance from successors in interest Disclosure of insurance exclusions, particularly involving food and children’s products Reasonable Self Insured Retention (SIR) Disclosure of indemnity and insurance agreement to insurer Proof of status as an additional insured, policy, and certificate of insurance Secure the right to approve the selection of indemnity counsel or obtain veto power Require indemnity counsel to report case developments Secure the right to fire indemnity counsel and obtain new counsel at indemnitor’s cost Secure the right to sign off on settlement agreements

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Although this list is not all-inclusive, it covers many major contingencies that may result in exposure. However, it is important that U.S. companies have a tender process in place. Indemnity and insurance agreements are meaningless unless the parties know how and when to act upon them. Key people within the U.S. company must be responsible for keeping track of all vendor agreements, certificates of insurance, and other pertinent information. This repository must be updated and monitored to address any developments in the relationship that warrant modifications to the parties’ agreements. It is particularly important to ensure that insurance coverage does not lapse. Finally, U.S. importers need to remain involved in the litigation. They should not allow indemnity counsel to take over the defense without reporting case developments on a regular basis. 10.8.9

Third Party, Public Liability Insurance

Commercial general liability insurance (CGL) affords coverage for alleged bodily injury as well as related defense costs. Defense coverage ordinarily applies to any claim for injuries and damages for which the insured may be entitled to indemnity. These defense costs should be paid apart from indemnity coverage. The defense obligation should not be compromised by a fixed limit or aggregate cap. The scope of indemnification under an insurance policy is limited by “per occurrence” provisions and exclusions. It is imperative to be familiar with the per occurrence provisions and exclusions that affect your client’s sector of any industry. 10.8.10

First Party Insurance

First party insurance policies can protect sellers from financial losses, such as loss of or damage to inventory, resulting from all losses, or a particular peril. These policies provide coverage for the actual case value of lost goods using the broad-evidence rule, which allows consideration of market price, replacement cost, and other factors. 10.8.11

Specialized Insurance Coverage

Specialty insurance policies have been developed to address the risks of loss in the food industry. These specially tailored policies reduce exposure gaps in other insurance coverage and litigation. Policies designed to cover the costs of recalls, product tampering, product rehabilitation, and related expenses are not readily available. These policies are not standardized, but contaminated product polices usually will cover costs of inspection, withdrawing, destroying, and replacing suspect products. Some policies even provide protection for business interruptions and lost profits caused by the actions of governmental agencies and civil authorities. Food suppliers should particularly consider investing in specialized coverage to insure against loss for contamination. Once a food contamination strikes a

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particular sector of the food industry, insurers are less likely to issue new policies for such future losses. Thoughtful vendor agreements with insurance and indemnity terms that think ahead to the inevitable scenario where the parties find themselves as codefendants in litigation can help pave the way to concerted defenses with no infighting. In this way, plaintiffs can be made to prove their own cases and codefendants can work together, rather than against one another.

11 Records Retention and Dangerous Documents Records are an important reference tool for the operation of any business. What was discussed, what was decided, who was involved, what was actually done, what were the results, what are the future plans, a thorough recorded history of what happened within the company at any given time regarding any specific issue. Corporations have a lot of items to address and decisions that need to be made on a daily basis, and the issues and decisions are normally recorded so they can be communicated to others and referenced at later dates. There are countless documents that are generated every day: documents involving internal correspondence between individuals and departments, test reports, engineering change requests, system audits, design reviews, production reports, and numerous others. In today’s business more and more of these are all-electronic and many companies strive to be paperless; nonetheless, many of the same documents are routinely printed to take to meetings or for quick and easy viewing, and then might be piled on top of the person’s desk or in mailbox trays in case they are needed again at a later date. Although electronic storage seems to be the ultimate answer, people commonly seem to misplace many of their electronic documents, and then end up asking others to send a copy back to them, if the other person can even figure out where they stored theirs. There will be the everyday excuses, “I think I accidentally deleted my file,” or “IT made me get rid of a lot of files because I was taking up too much space on the system,” or “I can’t figure out where I stored it, or how I identified the document.” In the old days we printed everything and stored the documents in folders. Every memo was in a Memo folder, test reports were in a Test Reports folder, meeting

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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minutes were in folders labeled for that specific type of meeting. Technically, electronic documents can all be stored in the same electronic files, but for some reason are not. They are left attached to emails or individually stored in “My Documents” with whatever title you gave them. And then if your hard drive crashes on your laptop, and you did not back it up in recent months, you will probably be out of luck. 11.1 RECORDS RETENTION PROGRAMS Because records are so important in our everyday business and for future reference, companies need to maintain Records Retention Programs and schedules.

Figure 11.1 Example of a records retention schedule.

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Which documents need to be maintained, by who, and for how long, needs to be determined for every company. That instantly creates the question “How long should records be kept?” Manufacturers that are not part of tightly controlled trade industries with well established guidelines, such as medical equipment, pharmaceutical, food, aerospace, nuclear, or government suppliers, end up not knowing how long they should keep any kind of document. The answer I provide is “Whatever makes good business sense for you.” “How long might you need to refer to the specific type of document?” “Keep the documents for that amount of time.” In most industries there really is not a requirement to keep documents for any specific time frame. The company just needs to establish a procedure or policy as to what the retention period is going to be, and then follow it. Of course, in this electronic age it is a little tougher to enforce any type of policy because no one really sees the documents—they are just taking up storage in cyber space somewhere. This can then result in two related problems: because the documents are electronically stored, they are never disposed of, or the opposite extreme, the IT department becomes alarmed because the corporate server is becoming maxed out with saved documents, so the focus then shifts to immediately dumping records to free up system space. The Records Retention Schedule (Fig. 11.1) is a good start to controlling that the various documents are hopefully kept for the required time frames, but it is far from being the total answer.

11.2 HARD COPY STORAGE In dealing with traditional records one of the largest problems that ultimately faces companies is where to store the documents. When the documents pertain to active issues, they are kept in everyone’s office so as to be readily available for reference. When the related issue is no longer active, the documents still tend to remain in place until such time that the individual or department does not have enough storage space. At that point, usually at the end of the year, the files are pulled and loaded into file boxes and moved to another storage area, downstairs, in a special locked crib somewhere, in an offsite storage/warehouse area, or for some companies even stored in underground salt mines. In any of these scenarios, for the most part, they now become “out of sight, out of mind.” But the problem does not really end there. Eventually these out-of-sight locations reach capacity too, and once again the troops are called in to sort through each of their departmental boxes of files and determine what can be shredded. Many times this is a Saturday morning—a blue jean project as they begin to open cartons and sort through the files to try to determine what can be disposed of. Hopefully they are working from a retention schedule, but that might not always be the case. One of the reasons this becomes so problematic is because files were just pulled from file cabinets and other areas, loaded into the boxes, and carted away. Little, if any, effort was made to identify what was going into the

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Figure 11.2 A typical storage area.

boxes, and to keep files of the same retention period together. In many situations these remote storage areas begin to take on the appearance of the photo in Fig. 11.2. With a little more upfront effort at the time the files are being removed from the offices and departments and loaded into the file boxes, the efforts can be much easier when it comes time to finally dispose of the boxes of files, as shown in Fig. 11.3. Each of the cartons is labeled as to when the carton should be pulled from the storage area and destroyed. So the process is far more efficient and does not require the assistance of the individual departments to sort through the contents. All files with the same retention period are packed into each carton. The identification of the contents can either be displayed on the front of the carton, or the carton can be numbered and the contents recorded on a separate list.

Figure 11.3 A more organized storage system. (See color insert.)

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11.3 RECORDS CAN BE KEY FOR DEFENSE In a product liability lawsuit, the company’s records can become paramount for Defense in proving that the company handled every situation in a responsible manner. Being able to factually address how all the product development stages were handled, showing that the product was in compliance with standards, thoroughly tested, and properly marketed can prove to be a real asset for the defending attorney. In a lawsuit attention will be focused on the following areas: † † † † † † † † † † †

Drawings and specifications, Sales and purchase orders, Contractual agreements, Product correspondence, Advertising materials, Warranties, Warnings and instructions, Test reports, Design validations, Product safety reviews, and Customer complaints.

As the attorney for the plaintiff tries to allege the manufacturer was irresponsible and negligent in its actions or lack of actions, these records could help prove such allegations wrong and come to the defense of the manufacturer. As it relates to Engineering, attention will be focused on the following: †

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Blueprints and specifications at the time the product in question was produced, maybe 3 –5 years ago; Copies of the actual warnings that were applied to the product, along with drawings that show where they were applied; Instruction manuals that were supplied with the product in question; Design review minutes that were held on the product when the product was first developed; Engineering changes that took place, and maybe for a few years before and a few years after the product in question was manufactured.

One of the problems companies run into is that when it comes to drawings, specifications, warnings, and instructions, we tend to keep readily available the most current version. After all, if the product is currently being produced to Revision “R,” then all the drawings and specifications for Revision “R” are all the department and company are interested in. However lawsuits do not normally deal with today’s product; they commonly involve products made 3 – 5 years ago, or

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more. Three years ago when the product alleged to be defective was produced, the design was at the Revision “C” stage and it is those records that are being demanded, not today’s Revision “R” records. There will be two issues to address and prove: was the product in question built in compliance with the drawings and specifications that pertained to it (or be a possible manufacturing defect), or were the drawings and specifications at the time of Revision “C” defective in themselves (design defect)? If the drawings cannot be reproduced attorneys for the Defense are going to be at a loss. Second, “Copies of the actual warnings that were applied, and where”—one of the requirements of adequate warnings is the conspicuousness of the warnings. In the event that the product in question no longer has warnings on it, for various possible reasons, will the manufacturer be able to present documents that demonstrate what the original warning labels looked like, and drawings that specify where they would have been placed? Then there is the issue of instruction manuals. Again, many companies will maintain the most current version because if any need to be printed for an upcoming production rerun, this is the only version that matters. But the question at hand might be “What was supplied to the customer 3 years ago?” “Inadequacy of warnings and instructions” has been found to be a leading cause of product liability lawsuits, so will the manufacturer be in a position to prove otherwise? Finally, the question would logically be asked as to why anyone would request all the engineering changes that were initiated say for a period of three years before the manufacturing date of the product involved in a product liability suit, and three years after? What the attorney for the plaintiff would be trying to discover is whether there was willful intent to correct a defective condition that surfaced, without initiating any kind of recall, or whether management might have been involved in an irresponsible effort of trying to reduce the cost of the product (value engineering), which could have resulted in a less safe product. A question commonly asked at my seminars is “What if we are asked for a specific record five years later in a court case, and we cannot provide it any longer, would we not appear to be negligent for disposing of the records?” The answer is no. If the manufacturer explains that the record in question is only maintained for a three-year period per their records retention program, the fact that it has been discarded does not imply negligence, nor will the manufacturer be at a loss to prove that the expected design reviews and other responsible efforts took place. If the manufacturer can show that their procedures require certain product safety efforts to take place, and they can prove that the efforts have routinely taken place on other products where the records would still be available, it should be sufficient to prove to the court that such efforts took place regarding this product too, even though the records are no longer available. It is not practical to attempt to keep records forever in the event of a possible product liability suit sometime in the future, so the rule of thumb is to keep the records for as long as it makes good business sense, or for as long as the management team might need them for reference. The real problem is with the company that may have such a retention schedule, but in fact does not throw anything away. A policy or procedure might require that certain records be kept for three years, but who polices the various departments to ensure the

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records were then destroyed? There are many quality and engineering people that keep everything they ever wrote, or everything that has their name on it, for as long as they are with the company. A record with a three-year retention policy, might still be there 20 years later, if the employee is still with the company. Then when a product liability case surfaces 10 years after a product was manufactured and the plaintiff requests every document that pertained to the design and manufacture of the product, a request that the manufacturer should be able to respond by saying “We’re sorry, but such documents no longer exist,” now the document does exist and therefore would have to be surrendered, which then brings up the concern as to what it actually says.

11.4 DOCUMENT MANAGEMENT AND RECOGNIZING “DANGEROUS DOCUMENTS” A common problem for manufacturers involved in a product liability case is the discovery of dangerous documents, or what is otherwise known as the smoking gun. This is one of the leading reasons companies lose their cases. These are documents that show the manufacturer at some point in time was cognizant of a defective condition and did not handle the situation in a proper manner, or created an unsafe condition for what would appear to be financial gain. Nothing is more disastrous for the manufacturer’s defense in a product liability case than the plaintiff’s discovery of internal documents, or email messages, that prove the manufacturer had prior knowledge of product or design defects and failed to react in a responsible manner. Such documents have put the final nail into many manufacturers’ coffins. Documents are crucial for explaining the development and entire lifecycle of a product. They can serve as evidence that the manufacturer made every effort to assure a well thought out safe and reliable product. Various records can identify problems experienced in the development and testing of a new product, along with the actions taken to correct the problems. Such documentation can be very effective in proving that the manufacturer operated in a very concerned and responsible manner. However, from the opposite perspective they can tell the story of concerns that were expressed over the safety and reliability of a product, and the lack of any action on the part of management. They can tell how known defects were identified and disregarded by management, possibly due to cost considerations, the drive to get the product into the marketplace, production pressures, or a number of other actions that will place the company in a very negative light. One of the first problems faced in document control is the misconception by management, even top executives within a corporation, that their letters and memos are confidential and are protected from the viewing of outsiders. Nothing could be further from the truth. When a company enters into a product liability lawsuit, and counsel for the plaintiff demands to see every memo, report, email correspondence, and letter written that discusses the product, the manufacturer will be under court order to provide them.

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From the other end of the spectrum, plant management might speculate that their less important daily memos or email messages are insignificant, and could just be discarded if such a legal search and demand took place. This is also a false perception, and in fact if such memos were discarded at the time of litigation, managers involved could face serious legal consequences. The objective here is not to figure out what to do with problem documents, it is to recognize what they could look like and stop them from being generated in the first place. In everyday production companies, management teams are exposed to problems and concerns they have to address, some of which involve issues centered around the economics of manufacturing and marketing of the product, many that deal with the design and components for the product, and others that might deal with the existing procedures in place or represent negative discussions between departments or individuals relating to production. Let us look at a few fictitious examples of potentially dangerous documents and discuss the problems with them. Although in the example in Fig. 11.4 it might at first appear as something no one would really write, it in fact represents an area of concern that many companies deal with, and that is the financial goal of holding the cost and maintaining the margin. In countless ways, shapes, and forms, companies are going to have discussions

Figure 11.4 Example of a dangerous document.

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regarding product costs and design issues and the concern will then surface as to whether dangerous documents are being generated. Some groups may want to keep the product as cheap and simple as possible, “Don’t add anything more than absolutely necessary,” in order to make as much of a profit as possible. When such an internal debate surfaces and the memos and emails follow, no one within the organization will be thinking “lawsuit” because they will all be caught up in the moment. But 3 –5 years later such a document could surface in a product liability case and demonstrate to the court that the company was more interested in “making a profit” than they were in ensuring a safe and reliable product. As mentioned previously, engineering records will be a key target in the Discovery process. More issues seem to surface in this department that plaintiffs can take off on than any other typical department. The “Engineering Change Request” (ECR) file can many times prove to be a goldmine for plaintiffs as the various reasons for design changes begins to surface, as well as other aspects of the evolutionary process of the product. In the example in Fig. 11.5 someone within management recognized what they thought was a potential problem with a transformer operating at what seemed to the individual to be a high surface temperature, but rather then leaving it at that, they went on to possibly exaggerate the condition by adding the additional statement of “ . . .starting on fire.” Did the individual really believe the surface temperature was high enough to start something on fire, or were they just trying to ensure that the ECR would be approved and processed? Any electrical component can be quite hot to the touch, but not be within hundreds of degrees of what it would take to actually start a fire. What would have been more logical would have been to say “Transformer runs extremely hot, which will reduce its lifespan,” which would be a true statement because heat normally always results in a shorter lifespan of electrical components. Let us say in this situation the surface temperature was 1808F, which would have been far too hot to place your fingers on, but nowhere remotely close to the 4508F temperature required to even ignite tissue paper. So the design engineers did not feel the temperature was excessive and therefore did not support the need for a design change, and the ECR was basically rejected and filed away. But let us say a house

Figure 11.5 Another example of a dangerous document.

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catches fire during the night, one child dies of smoke inhalation and it is known that the child fell asleep and left the TV on, and as the fire seems to have originated in the area of the TV, the insurance company and the attorneys for the plaintiff sue the television manufacturer. Let us say that the real cause of the fire was due to the family cat biting through the electrical cords behind the TV all piled on top of the carpeting, but all of that along with the TV itself burned up, so the logical target becomes the TV itself. During the discovery stage and the request for documents, this ECR surfaces. Attorneys for the plaintiff read the change request, see the concern regarding this being a potential fire source, ask the defendants whether they ever added the recommended “heat sink,” and find out they did not. Now the plaintiff feels they have the smoking gun document that will significantly support their case. The manufacturer will challenge the allegation by saying that the transformer could never have started a fire, but the Defense will have problems dealing with this client’s own document that clearly states the transformer is so hot that it could possibly start the television on fire, which is exactly what the plaintiff alleged happened. In Fig. 11.6 we uncover an out-of-spec condition of supplied component parts, which surfaces as a complete surprise to the manufacturer. The specifications were

Figure 11.6 Another example of a dangerous document.

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originally established—everything was going fine and no one bothered to routinely check the part, then suddenly without notice the component or material changes and is no longer in compliance with requirements. In this situation the injection molded power supply housing goes from being flame-resistant to flammable. This would be similar to the children’s toys supplied to the U.S. company from China in 2007 suddenly being detected with lead in the paint, when the original paint specs were established using lead-free paint. Now the manufacturer is in a tough situation. If there ever was an internal short in the power supply that caused a sudden arc or flame, the original housing would have protected the condition from spreading. Now if a short were to happen in the out-ofspec housings, the housing itself would ignite and the fire would take off. However, knowing when the condition surfaced may be challenging, along with where those products might be at the present time. And this all centers around the need for an electrical arc, which by itself might be remote, but there are numerous causes that could possibly create the effect. The quality management decides to immediately notify the supplier to quickly get the condition corrected, and demands that the supplier put controls in place to prevent it from ever happening again. Then the quality department rejects all the parts in stock, and disassembles everything in the warehouse, and replaces the housings with the new ones once they are shipped in. But there are possibly tens of thousands in the field that are also flammable and would be very hard and costly to recall, so the manufacturer decides to leave those and just do everything possible to prevent it from ever happening again. More than a year later the manufacturer begins to receive a few notices of fire claims allegedly involving their power supply, but it is not definite (to the manufacturer) as to whether the fire truly started with their power supply, or whether the product was just a victim of the same fire. At this point there may be a few hundred thousand of the products in the field and plenty of opportunities of them being in a building that has a fire. The manufacturer’s first instinct is to defend the design, the fact that it is UL approved, and that the housing is flame resistant, so there is no way the power supply could cause a fire. This presents an initial challenge to the plaintiff, but as they go through the discovery stage along with their request for documents, this document surfaces. The plaintiff asks the manufacturer if any of these defective housings made it to the field, finds out they did, and then asks what they did about those in the field and finds out they basically did not do anything. Again the document helps to build the case against the manufacturer. Every manufacturer is expected to have a comprehensive quality program in place. If there is not a quality program in place they could easily be put into a bad light and not considered to be state of the art. But with such a program, whether it is ISO certified or just the basic equivalent, you will need to have formal procedures and processes in place, and the system then needs to be audited at some frequency to ensure it is being followed. Just having a manual on the shelf would not prove to anyone that the company is really focused on ensuring quality. As we routinely audit the system we inevitably find that certain procedures and processes are not in fact being followed. This is where we create documents basically identifying that although we

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have a comprehensive control system in place, we do not follow our own procedures and processes. Now let us say a product liability case surfaces involving property damage or injury by a product that the plaintiff alleges was defectively assembled or produced—a manufacturing defect. During the manufacturer’s investigation into the incident they have come to believe that the product was tampered with or altered by the end user, and it was this alteration that led to the damages or injuries. As part of the manufacturer’s defense they counter the allegation with their own contention that such a defective product could not have left their plant, because of their comprehensive quality program. Then, again, during discovery, as both parties have taken a firm stand on their beliefs, the document of Fig. 11.7 surfaces, stating that the company really does not always follow their “comprehensive” quality program, and opens the door to the possibility that such a defective product could have easily been packed and eventually made it into the hands of the end user. This is not to imply you should not have a comprehensive quality program in place, nor imply that you should not audit your program, because both of those situations would create their own negative impressions, but you have to be cognizant of the situations you could be creating if not addressed properly. To begin with management needs to realize how important such a system is, and enforce it at all times. It should not take months to find out that certain procedures were not being followed,

Figure 11.7 Example report which could become problematic.

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and when it is found there has to be immediate corrective action by top management to ensure it does not happen again, as well as to address any affected products.

11.5 ELECTRONIC DOCUMENTS AND DISCOVERY In today’s business world most communications are handled electronically through email. If meeting minutes or reports need to be created and distributed, they are done so electronically. What used to be yesterday’s typed, printed, and circulated memo, is today’s quick and informal email message. All kinds of concerns can be made known instantly via email. Because of the simplicity of the communication medium, the lack of a hard copy, and the perceived quick elimination of the record, many users fail to recognize the dangers. “Attached is our report on the product. I think this is really a bad design and will likely end up seriously injuring people and leading to lawsuits. After you have read the report, delete it along with this email. We’re going to delete the report on our end too.” It is as simple as that. Push the magic delete button and everything is gone, or so it seems. The fact is there are four types of data files for everything created electronically: † † † †

Active data, Replicant data, Residual data, and Backup data.

Active data is information available to any user of a particular computer or a computer system. Examples include word processing documents, email messages, databases, and spreadsheets. Replicant data are simply backup copies of the active data that your computer automatically generates in temporary files, and are not deleted when the active data is deleted. Residual data is information that you have deleted, but the computer has not overwritten with additional data. Information deleted simply becomes “available disk space,” which the computer can ultimately use when needed. Backup data is information routinely copied to backup tapes. Most corporations have servers that back up data, usually daily or weekly. The fact that the computer systems have all of these automatic backup systems is the reason why documents can be found by IT experts, even though the user thought the documents were deleted and would never be seen again. And with email, when a user sends someone an email message, the original message is not sent. Instead, the user’s computer stores the original document and produces a copy it sends to a file server. The file server, in turn, stores the copy and produces another copy to send on. Depending on the computer network structure, the email message may go through two or more servers, with each storing a copy and making new copies to forward to the intended recipient. Each time the message is “handled” by another server or personal computer, another copy is made.

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11.6 THE NEW e-DISCOVERY BURDEN1 On December 1, 2006, the Federal Rules of Civil Procedure governing the discovery of electronic data were amended. Although the changes were designed to reduce litigation costs, we have seen just the opposite. The amendments broadened the definition of items subject to legal discovery, ranging from “documents” or “data compilations” to include all electronically stored information. Parties in a lawsuit can now demand from each other wordprocessing documents, emails, voice mail and instant messages, blogs, backup tapes, and database files. Failure to comply with these sundry electronic production obligations can lead to serious sanctions, sometimes to the tune of millions of dollars. In the aftermath of all the changes in the e-discovery landscape, let us take a closer look at how recent rulings are shaping the legal terrain.

11.6.1

Retention Policies/Litigation Holds

It is not unusual for companies to purge hard copy and electronic information after the expiration of a predetermined time limit. (Deleted electronic information often can be recovered from backup tapes, but at a cost.) A company will not ordinarily be sanctioned for deleting emails as part of what the law considers a “routine, goodfaith operation.” However, if a company becomes aware of potential or actual legal action, it must institute a litigation hold to preserve relevant information, notwithstanding preexisting retention policies. And the hold must not just be a policy to preserve relevant information—the policy must be followed in practice. Indeed, in the case of United Medical Supply v. United States, the responding party was required to come forward and establish that the litigation hold was effective in practice.

11.6.2

Insufficient Resources

Can parties ever escape their electronic discovery obligations because they do not have adequate financial, manpower, or technical resources to comply? Some courts are not sympathetic to such a plea. In Williams v. Taser International, the responding party was a relatively small company with about 245 employees. When faced with electronic discovery obligations, Taser hired and trained a technology employee to manage the discovery process. The judge said this was not enough. He maintained that the company still had to make all reasonable efforts, including the retention of additional information technology professionals to get the job done.

1

Attorney Eric J. Sinrod, Law Firm of Duane Morris.

11.6 THE NEW e-DISCOVERY BURDEN

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No Reasonable Accessibility

You often hear that electronic discovery materials are not reasonably accessible and would, therefore, not need to be produced. Unfortunately, that argument is not always accepted, especially where the probative value of the information outweighs the burden of production. For example, in Best Buy v. Developers Diversified Realty, the responding parties argued that emails and other electronic information were not reasonably accessible because the information would have to be retrieved from a backup system. They contended that the cost of recovering the information would be in the six figures. The judge was not having any of it and ordered the information produced within a mere 28 days. 11.6.4

Format of Produced Materials

Disputes may arise over the proper format of electronic material the sides must produce. In Williams v. Sprint, the court ruled that electronic documents had to be produced in native format. This meant that metadata had to be intact, including features such as file owner, date of creation, senders, recipients, routing data, and subject lines. In the more recent case of Columbia Pictures Industries v. Justin Bunnel, the court disagreed with the responding party. The judge ordered the production of information temporarily stored in random access memory—even though such information might only be stored for extremely short periods of time. 11.6.5

Cost Shifting

Responding parties have argued that costs of complying with electronic discovery demands should, under certain circumstances, be shifted to the propounding parties. This is more likely to be the case where the costs associated with electronic discovery are expected to be high and the probative value of the discovery sought is relatively low. More often than not, however, parties are required to pay for their own costs when producing electronic information. In PSEG Power New York v. Alberici Constructors, the responding party argued that it should not have to pay the heavy freight of producing a large volume of emails along with attachments. The court disagreed. 11.6.6

Sanctions

Getting it wrong when it comes to fulfilling electronic discovery obligations can have major repercussions in terms of the potential for sanctions. For example, in the case of Z4 Technologies v. Microsoft, when it came to light during trial that certain email evidence had not been produced during discovery on a timely basis and that the existence of a database was not disclosed in a forthright manner, the judge ordered Microsoft to pay additional damages of $25 million, as well as practically $2 million in attorney’s fees, for litigation misconduct. This is no small price tag, indeed.

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Disclosure of Privileged Information

Finally, what happens when a judge appears inclined to issue sanctions, and attorneys want to seek to justify their conduct? This is a complicated matter. On the one hand, attorney efforts geared toward electronic discovery can constitute confidential attorney work product and can involve privileged attorney – client communications. On the other hand, if it is the client that is stonewalling appropriate electronic discovery, the attorneys for that client want to be able to explain that they should not be sanctioned based on the approach taken by the client. To make that argument, the attorneys might have to circumvent the attorney work product doctrine and the attorney – client privilege. This came up recently in the Qualcomm v. Broadcom case. Attorneys sought to invoke the self-defense privilege exception to explain their electronic discovery role to the judge. Although the judge ruled that the attorneys could come forward with respect to work product, they were not allowed to get around the attorney – client privilege. There will likely be further developments in this area. This is just the beginning. The Federal Rules of Civil Procedure were amended less than one year ago. But as we have seen, rather than streamlining and limiting litigation, electronic discovery causes yet another expensive track for legal disputes.

11.7 EMPLOYEE EDUCATION To help prevent the problem of dangerous documents surfacing at some later date when the company is involved in a product liability case requires the education of the entire management team. Focuses on design reviews, product safety reviews, or testing products are primarily aimed at specific departments, but records retention and especially dangerous documents involve everyone within a company. Most employees just are not aware of what could ultimately happen, or think that they can easily dispose or delete troublesome documents if the need ever surfaced, or are likely to think that internal documents are considered confidential and could never get into the hands of someone on the outside; however, they need to be trained. The corporate product liability team needs to spearhead training and awareness programs for all employees, and part of that training would deal with the topic of dangerous documents. Once the employees learn these key precautions, it is amazing how they react from that day forward. Employees will call attention to dangerous documents the instant they see them, and correct others for generating them.

12 The Administrative Team

Developing and implementing a comprehensive product liability prevention (PLP) program and effort in most manufacturing corporations will take a period of many months. The larger the corporation, with multiple plants and divisions, the longer it will take and the more administrative effort it will require. Typically it is not as complicated as the launching of other major programs such as the implementation of a Quality program, Lean Manufacturing, Six Sigma, or other comprehensive efforts that involve all of the management team, but there are a number of facets to PLP that require investigation, planning, and developmental effort. Because of this the program not only requires the appointment of a champion who becomes the in-house expert, but it will be most effective if a small corporate group is also created, or the administrative team. Realistically the PLP program should be an enhancement to existing company procedures such as the Quality program, as opposed to it being a stand-alone program, and the newly developed policies should become add-ons to those procedures that are already in place. This is why it has been referred to many times as “The Next Dimension in Quality.” This focus spreads out into a lot of other areas of the overall operation, basically every area, so it becomes difficult for any one person to successfully spearhead all of it. Realistically, a number of different projects related to the program will be driven simultaneously, which is another reason why it is best driven initially by an administrative team. So it is optimum to have the other members of the administrative team help out in the planning and execution, especially if those selected candidates already play key roles in these other areas. Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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Evan after the initial program has been developed and implemented, the administrative team will continue to meet on a regular basis to discuss current issues, field claims, as well as discussing cases in litigation.

12.1 SELECTING A PRIMARY DRIVER As the corporation begins to focus on this area of concern, its first major objective is to select the right internal candidate to head up the function. Often the individual who goes out and learns this subject, either through a special seminar or at a conference related to the topic, immediately recognizes the significance and comes back to the company and begins driving the effort. Usually such an individual has a high degree of self-confidence and is clearly capable of initiating such an effort without hesitation. Other individuals that come to such seminars and are the sole participant from a company immediately realize they could never initiate such a program within their companies and either recommend others such as their department heads attend future seminars, or heavily suggest to the right people that it would be a great topic for an in-house training seminar. The primary driver is then selected after that event. Selecting candidates to drive most newly launched corporate programs might capitalize on individuals that are well received and respected and looked up to by the other members of the management team, while other programs might favor an individual’s technical knowledge and abilities. This individual needs to have all these attributes and more. The primary driver needs to have a good grasp of the technical aspects of the products being produced, have a good first-hand knowledge of product reliability and possible design issues, be an individual that employees are going to look up to and take direction from, as well as being a good diplomat in the field. The individual selected to head up this function needs to be a self-starter, capable of intelligently discussing any aspect of technical product or process, and have the administrative abilities to drive an entire program and effort from scratch. The individual should be able to leave on a moments notice and fly to other parts of the country to meet with attorneys and insurance company representatives and diplomatically investigate and discuss the issue at hand, remaining calm under pressure. The individual should already be reporting directly to the President or CEO of the corporation, and should be able to command the necessary support and respect of everyone throughout the organization. The individual selected needs to be able to effectively communicate where the corporation was negligent or remiss in a situation that led to a liability, without being offensive to any other departments, or defensive of their own. The ideal candidate would be in a neutral position, as it relates to the design, engineering, and manufacture of the product, and therefore have the effective capability of fairly judging all three disciplines. Thus, the most logical choice for heading this area of responsibility, in lieu of anyone in the legal department being given the role full-time, is typically someone in a staff position that interfaces with engineering and manufacturing, product technology, and reliability. Typically, this type of individual already has the technical knowledge and administrative abilities, and in all probability was instrumental in developing some of the company’s other preventive programs and efforts.

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The product liability expert, promoted from within, does not need to have a legal background, nor will they need to start taking such college courses. The knowledge needed will be acquired slowly, over months and years, especially as they get involved in legal issues in the field. Corporations must remember that up to this point no one was primarily focused on this area, so now that someone has been appointed, the company can surely afford to let the person learn the ropes, and in essence, the whole company will learn simultaneously.

12.2 CREATING THE ADMINISTRATIVE TEAM The next important move is to create a small administrative or corporate liability team. Regardless of the size of the company, this should not be a large team, preferably having two other players. The newly appointed product liability expert should play a key role in this selection, because these will be the individuals the expert will need to work closely with and rely on when making many of the future decisions and strategizing with regards to future litigation. These should not be individuals; either preselected by someone else or self-appointed, with whom the expert could potentially clash, nor individuals with strong personalities and possibly their own agendas. So it is best for the expert to have a key role in the selection of these individuals. These should also be individuals that bring something unique and beneficial to the table. For instance, it is not likely that the Chief Financial Officer (CFO) would have the technical product knowledge to take on the role of the product liability expert, but the individual is likely to know the insurance part of the business better than anyone else along with the policy provisions, and could serve as the intermediary contact with the insurance company when they need to be notified of newly reported incidents, claims coverage issues, or the need for them to identify a claims representative in the area of the incident as well as to find a local attorney to represent the company. The CFO might also be well versed in some of the other contractual terms and conditions that exist throughout the company in various agreements. So this is one possible candidate that should be considered. Depending on how large the corporation is and how it is structured, there could be a number of other individuals that would complement this team. If there is a staff head of reliability or technology, someone who is responsible for the testing and validation of new product designs, this would also be a good candidate. As incidents surface where it is alleged that the product catastrophically malfunctioned in some unique manner and special lab tests need to be conducted to verify or disprove such a possibility, or technical questions arise that go deeper than the expert’s own field of knowledge, then this type of individual could also make a significant contribution to the team. Beyond these few examples, and depending on the company’s size, complexity, and the number of positions and areas of responsibility that exist, there could be a number of possible candidates for consideration. Again, the group should be kept small and each candidate should bring something unique to the table that would compliment the overall program.

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12.3 GAINING THE NECESSARY KNOWLEDGE The in-house expert, along with the administrative or corporate liability team, must then start their own educational process if this team was not already launched from an inhouse seminar or after attending a public seminar on the topic. Of course, all of this is contained in this book, so it might just be a matter of having everyone on the team read the book and discuss the contents as they are reading through all of it. Otherwise it is a good idea to either attend one of the author’s own public seminars or spearhead an in-house seminar. People read at different speeds, and have different levels of comprehension. By attending a two-day seminar the team will gain a quick overall perspective of the program’s requirements, and can then read the chapters to better understand the details. Areas that need to be addressed from an overall corporate perspective include such things as helping the Chief Executive create a product liability policy statement; getting everyone within the organization more aware of what needs to be done in every area and understand all the potential problems they could be creating; reviewing the supplier and subcontractor selection and qualification process from this new perspective; addressing insurance coverage and indemnification clauses; reviewing the fine print on their own purchase orders; making it a practice to review the contractual agreements that exist between them and their customers and numerous other parties; and many other issues.

12.4 ANNOUNCEMENTS TO THE REST OF THE ORGANIZATION Once the expert and corporate administrative team have been appointed and have received some initial education, the appointments should be communicated to other members of the organization. It is important for everyone to know who these key players are so that as issues begin to surface, the other employees will know who to come to with the information. This is best announced at some regularly scheduled employee meeting, or by calling a special meeting of the employees in order to make everyone aware. I mention that the newly appointed expert and team would first want to gain the necessary training, because at the time of this announcement it would be beneficial if they could present information and examples that would begin to create an awareness amongst the rest of the employees and help them to understand what the focus is all about. So this meeting to announce the appointments might be best carried out if it were to become a product liability awareness session, which would include a certain amount of training, as well as an opportunity to announce the new team. Employees are commonly alert and curious to activities taking place around them, and could be very sensitive to sudden inquiries or investigations taking place in their areas, so the new focus should not be kept under wraps any longer than is really needed before making the other employees aware of it or it could lead to unnecessary anxiety.

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12.5 SELECTING AN OUTSIDE ATTORNEY The expert and corporate administrative team will need guidance on many of the issues they will be addressing from this point forward. Issues like the terms and conditions of purchase orders, reviewing contracts, creating agreements with parties like dealers, distributors, service companies, and sales representatives, marketing issues, product safety issues, recall considerations, nonlitigation accident investigations, and many other situations will require legal assistance, so the expert and team should have an outside attorney on retainer that they can feel free to call whenever they have questions, assuming the company does not already have a Legal Department. I would emphasize here that one of the best considerations would be an attorney from a large national firm who has an excellent product liability defense background, meaning that he/she has taken numerous product liability cases to court, and won, as opposed to an attorney that lists “product liability,” but has handled few cases and possibly none in trial. Another key factor would be that they have experience in developing corporate prevention programs. This is a tall order and may be difficult to find outside of a larger city. I emphasize the value of securing an attorney from a large national firm with a substantial product liability defense background, because as you would be using the individual for advice and guidance, you may want to use the same individual and firm to represent you later when you are actually drawn into a product liability lawsuit. Other “jack of all trade” attorneys and small firm attorneys will be helpful when it comes to contracts and agreements, but when it comes to design reviews, product safety, recall considerations, and more, they will be out of their element and might start referring the company to others. And if you enter into a product liability lawsuit, in all probability they would not have the expertise to handle that either. In addition, working with a skilled product liability defense attorney from a large national firm means that the individual will have a lot of experience with a number of various items that can have a negative impact on a potential future product liability case and would guide the team in the right direction. So, as the attorney gains experience with the team, the company, and the company’s products, the attorney will be in the best position to defend the company, if necessary, if something should develop.

12.6 AUDITING THE OPERATION Once the team has been formed and trained and has some knowledge of what needs to be in place, then the first thing they should do is conduct an audit of the operation to determine the current procedures and practices being followed and begin to recognize the problems and opportunities. Box 12.1 presents an example of a self-audit. This example of a product liability prevention audit in Box 12.1 gives a good idea of what to look for in a self-audit, although the questions are somewhat brief and it does not go into deeper questions that would logically need to be asked depending on the audit findings and the type of company involved. It also does not really show what the

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BOX 12.1 SELF-AUDIT General Administration Has there ever been any type of formal in-house training on product liability prevention for the general management team? Have members of the Design and Product Engineering departments ever received any formal training or attended outside seminars while employed by the company in product safety reviews, hazards analysis, or risk assessment? Are product advertisements, product promotional brochures, and product packaging reviewed for potential liability issues, exaggerated reliability claims or inaccuracies by a trained product liability expert? Are key suppliers and manufacturing subcontractors expected to maintain product safety teams, hold design reviews, and test their products? If yes, is this requirement stated in any procedure and audited for compliance? Who within the company decides if a product needs to be recalled? Are procedures in place addressing the product recall process? Contracts and Agreements Are contractual agreements (including purchase order terms and conditions) in place with dealers, distributors, service companies, suppliers, and subcontractors that contain the necessary indemnification clauses that help protect the company against outside negligence and uncontrollable risks? Are the agreements and terms and conditions reviewed periodically by someone with a product liability background to assure they are still current and relative? Is there confirmation that the purchase order terms and conditions are actually being received by outside contractors and suppliers on a regular basis? Are agreements with the necessary indemnification clauses initiated and signed by dealers, distributors, service companies, suppliers, and subcontractors at the time the business relationship begins? Are purchase order terms and conditions a controlled document as part of the Quality System, or maintained and controlled by one central person, or do they just exist but do not appear to be controlled by anyone? Who has authority to change the standard purchase order terms and conditions? Do all purchasing managers, buyers, and purchasing department clerks know where the current terms and conditions are and how they should be distributed? Who has the authority to write or revise contractual agreements with outside suppliers, subcontractors, dealers, distributors, and service companies? Are service contracts offered to customers? If so, do they contain the necessary language and provisions needed to help protect the company from potential outside liabilities? Is there a contract review procedure in existence as part of the Quality System?

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Are these reviews performed prior to approvals and signing of the contracts? Do these reviews cover both the customer requirements and the company requirements? Do the contracts include provisions to limit exposure to risk and liability? Does your business manufacture products that are made to customer specifications/designs? †

If yes, are there indemnification provisions in the customer contracts protecting your company from any fault associated with design defects?

Do you develop the specifications/designs for customers? Does the customer approve all design specifications? †

If so, does the customer also basically dictate design specifications?

What documents do you have showing customer approvals? Who is the keeper of the documents? Where are customer contracts kept? Quality Assurance Have quality assurance personnel received any formal training in product safety or product liability prevention? Do quality assurance personnel have immediate access and knowledge of industry codes or standards regarding product safety that pertain to your products? Is there a formal set of quality procedures in place that is routinely audited with well documented actions regarding any noncompliance? Does the Head of Quality sign-off on proposed engineering changes? Is the Quality department made aware of product failures in the field, returned goods, and complaints to customer service regarding products? Are product field failures and nature of the failures statistically tracked and monitored? Product Design Reviews/Safety Reviews—Design Review Team/Product Safety Team Is there a new product development, product safety, or product reliability corporate policy statement in existence? Are new products developed through a design review team that includes members of each of the associated departments/concerns, and addresses such issues as manufacturability, reliability, testing, standards compliance, and state-of-the-art design? Is there a quality procedure in place that identifies the design review team along with each individual’s roles and responsibilities?

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Are formal documented design reviews held on new products being introduced, and are there minutes in place from previous products launched that substantiate this? Does a product safety team exist that addresses the issues of hazards analysis and performs risk assessments (separate from the product engineering role)? Is there a quality procedure in place that identifies this product safety team along with their roles and responsibilities? What templates or systems are used to perform hazards analysis and risk assessments (special software, standard FMEA, and custom checklists)? Does the design review team or product safety team consider such things as: †

† † †

†

What an end user could do with the product that would be considered reasonably foreseeable misuse? How the new product compares to state of the art in the industry? Whether the product complies with all known codes or regulations? Do they take into consideration extreme applications for the new product, climatic or environmental? What type of unique tests should we immediately undertake to ensure that the product or its materials will prove to be reliable?

Are final reports written summarizing the findings by the product safety team? If so, who are they given to? Who makes the final decisions based on the findings and decisions of the product safety team? Who ultimately decides on the necessity for warnings, warning label design and placement, modifications to instructions? Are warning labels designed or selected in compliance with national or international standards? Are design engineers aware of the Z535 standard for warning labels? Product Reliability Testing To what standards or criteria are products reliability tested? † † †

To whatever the customer asks for? Whatever the industry requires? The company’s own criteria?

What department or outside entity actually performs such product reliability tests? Are product test reports actually written for each new product launched, or retesting of existing products (look for verification)? Who receives these test reports, and who ultimately decides on the course of action? Where are product reliability testing records kept?

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How long are these product testing records kept? Is the retention period identified in any procedure? Are records maintained of in-process assembly and testing? Who receives these reports/records or reacts to their findings? Suppliers and Subcontractors Are key suppliers and manufacturing subcontractors expected to hold design reviews and have product safety teams? Are suppliers and manufacturing subcontractors expected to test their products? †

If yes, who within the company do they present their findings to?

Does your purchasing department or other qualifying personnel ensure that all suppliers and subcontractors have product liability insurance prior to being selected as an approved supplier? Is there a minimum amount of insurance required and is the level adequate for your line of business? Do your procedures require that key suppliers and manufacturing subcontractors list your company as an “additional insured” on their insurance policy? †

If yes, who keeps track of these policies within your company?

Warranty Statements Do you have a written warranty policy that is supplied to customers for products they purchase from you? Does your warranty policy cover all goods/services provided? Is the warranty policy dated so your employees know if they have the current version? Are warranties controlled by one central person or department to protect against uncontrolled versions, improper revisions, or improper legal language? Has anyone from a legal or product liability expert perspective reviewed your warranty policy(s) in the past 1 – 2 years? Do your warranty documents contain the necessary disclaimers regarding things like incidental or consequential losses, and so on? Are the sales personnel in possession of the product warranty documents and know what they include and disclaim? How do your people communicate and distribute your product warranty polifcies to your customers? What proof of communication or distribution do you have? Do you have a returned goods policy and procedure? Who is responsible for returned goods?

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How are returned goods handled and recorded? Are there reports generated regarding returned goods? If yes, who receives these reports? Is there a formal procedure in place that addresses customer quality complaints regarding products in the field, which may or may not result in returned goods? Are customer complaints about products recorded, investigated, communicated to the quality department, and internally addressed? How are incoming customer calls handled that may have implications regarding product safety, reliability, or possible liability? Legal Who within the corporation primarily handles legal issues, such as contracts, agreements, key product safety issues, and potential product liability notifications? Is this person at a staff level reporting to the President? If sales or customer services receives a call regarding an alleged accident, injury, or fire regarding a product the company manufactured, who do they know they should go to with the information? If the company receives a letter regarding an insurance claim for property damage allegedly due to a defective product, who handles or investigates the claim? Who within the company manages outside insurance claims, attorneys, or litigation? Do you have an outside attorney that you use for legal advice on issues pertaining to product liability, agreements, recall decisions, and other related issues?

right answers are, because that too would depend a lot on the type of company and product lines involved. Much of what is being referenced is contained in the various chapters of this book, so by reading the rest of the book one should be able to decide what needs to be in place. The objective is to see what procedures and practices are currently in place regarding each question, as well as to ensure that various procedures are really being followed, if they are in fact in place. Many times such an audit is best handled by an outside expert who is unbiased and would be less apt to automatically presume various items are adequately being handled without seeing supportive evidence and should know what really needs to be in place and happening. Nonetheless, such professional audits are not always possible, so the corporate or administrative team needs to be able to conduct them on their own.

12.7 DEVELOPING AN IMPLEMENTATION PLAN Once a thorough audit has taken place and the administrative team has compiled the results and recognized the potential problem areas, they will then need to prioritize

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Figure 12.1 Implementation plan represented as a Gantt chart.

the actions that need to take place. Realistically there will be a number of problems and issues that become visible. Everything cannot be developed and implemented at once, so priorities will need to be set. What issues are viewed as being the most important to the team? This is another reason why it is a good idea to have this team in place. The team needs to set the priorities based on the overall significance of each issue, determine which member of the team is going to drive each issue, and what the time frame for implementation will be. The team needs to put an implementation plan in place by developing a Gantt Chart as shown in Fig. 12.1. This is just an example of the implementation plan layout. The final plan could end up being two or three pages long, or more for a multiplant organization or if various projects were broken down into additional subcategories. The parties listed in the “Resp” column would be the members of the Corporate team that are going to primarily drive those individual projects, so it would not make any difference whether their names were listed or their titles.

12.8 ADMINISTRATIVE TEAM MEETINGS Once the audit has taken place and the implementation plan developed, the Corporate team would continue to meet on a regular basis. During the audit and planning stages the team should meet weekly. Once the plan has been developed the team could begin to meet biweekly, and once the plan is moving right along or is implemented the team should meet monthly. In the early stages of the program the team would meet to discuss how they are doing with the implementation plan and issues that are surfacing, and decide how

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best to handle the various issues. For instance, the team may have changed the terms and conditions shown on a typical purchase order form, but they still have 1000 of the old multipage forms available, so they need to decide whether they are going to trash the existing inventory or make a running change. There may be issues with regards to the membership of the design review team or product safety team that the Corporate team will need to rectify, or countless other issues that might surface. Eventually, reviewing the implementation plan will only account for 30– 50 percent of the meetings, as the team also begins to address product and possibly field issues that are surfacing, and eventually claims and actual litigation.

12.9 EXECUTIVE ACTION—A VIEW FROM THE CPSC 12.9.1

Product Safety Policy

The commitment of the manufacturer is the first executive step to be taken in developing an industrial consumer product safety system. A clear, strong statement from senior management citing statutory and voluntary reasons for this commitment is needed. The policy should be explicit with respect to the primacy of product safety during design, production, and distribution. This policy should also make clear that it applies not only to the internal operations but also to suppliers, including suppliers of products manufactured outside the United States. Ordinarily such a statement is publicized widely within the organization as a platform for subsequent planning and action. It may also be widely publicized outside the organization. 12.9.2

Organization

The organization and management arrangements by which safety requirements are executed are the prerogative of the manufacturer. Except in industrial activities of very limited size, responsibility, and authority for implementing particular elements in this handbook, and for meeting the requirements of standards, should be clearly assigned to specific persons at the executive level and to specific operating entities, such as the responsibility and authority for product recalls. Although management determines organizational patterns, it is also management’s responsibility to formalize its organizational decisions in writing and to make this information available to interested persons. 12.9.3

Training

Training, to a degree commensurate with the complexity and sensitivity of work assignments, is an integral element of effective safety systems. This training may be formalized (e.g., scheduled classroom meetings or on-the-job training) and it also may be accomplished by publications, bulletins, posters, or other media. Most personnel have need of information regarding regulatory safety

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requirements related to the products they help fabricate, distribute, or service, including information regarding the influence of their work on product safety. Certificates (or similar forms of recognition) are advisable when training programs are successfully completed for highly specialized skills. Generally, product safety training should be viewed and implemented as an ongoing integral element and not as an “add on” or occasional event.

13 Post Sale Duties to Warn and Recalls Facing a potential recall of a large number of products is probably the next worst experience short of a product liability lawsuit. Recalls can be devastating and the expense has put companies that have been operating for many decades out of business. Unfortunately all it takes is an oversight or error in the design review phase, manufacturing, supplier control, or management discretion, and the company could face an overwhelming disaster. Aside from a comprehensive upfront new product development procedure that includes adequate testing, one of the biggest mistakes is for a company not to have a recall plan or procedure in place, nor anyone assigned to spearheading this area of concern. The most efficient and effective severe storm disaster plan would not be created at the point the shingles are being blown off the building, but that will unfortunately be the point where many companies will first begin to address the issue. Although the primary objective of new product development is to eliminate or minimize the potential for product failure, it is a major mistake for the management team not to incorporate into the design provisions for identifying and tracking component parts as well as the final products produced in the event of a potential recall. Recall preparedness has become such an important factor that some of the leading insurance companies will not insure manufacturers if they find the manufacturer does not have a formal recall program in place. Consider the fact that when a defective condition is first discovered, such as products having the potential for starting a fire due to a defective component or consumable products that are found to have a harmful ingredient in some percentage of the products on the store shelf, the insurance

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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companies realize that the longer it takes the manufacturer to react, the more claims they can expect to have to cover. Insurance premiums are based on their exposure to risk. If 25 pieces of a specific shipment of a component part used in 5000 final products assembled 30 – 35 days ago and shipped to customers all over the country was now found to be defective and capable of starting a fire, how would you locate and identify those specific products that contain the defective parts? Would you recall all 5000 even though only 25 were affected? Could you determine which shipments/ customers were involved, or if you had to contact all 5000 of the customers, could you tell them how to identify the 25 that are defective? Would you even know how to contact the customers and what to specifically, even legally, say? What if it would be problematic to have the products returned, but they could be repaired or reworked in the field by skilled field servicemen—would you immediately know who to contact, especially if the products were in hundreds of major cities in all 50 states? Most importantly, do you even have someone within your own company that is totally on top of all this? The biggest and best companies in the world make mistakes and end up having to initiate some form of product recall. The key success factor becomes the company’s preparedness and speed with which they are able to react. But such ability requires planning, going all the way back to the product development stage. Incorporating by design traceability into all component parts as well as finished products is the first step in the right direction. As mentioned earlier, this is typically achieved through the serialization of as much of the product as possible. The next stage of preparedness is having someone already in charge before the need has arisen, and for that individual to know all the recall options and resources available to them. Initiating a recall does not always involve having the product shipped back to the company. It can involve a number of different options, such as the following: †

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Alerting the customer to a potential hazard, and possibly supplying them with new instructions and/or warning labels to place on the product in a predescribed location; Making available to the customer an optional safety guard or device, which could be free or available for purchase; Alerting the customer to a hazardous condition that the company will replace or remedy at specific service centers; Alerting the customer to a hazardous condition that the company will have a service agent repair at the customer site; Or, alerting the customer to a hazardous condition and supplying the customer with directions on how to return the product for a replacement or credit.

In essence there are a number of different options available, depending on the situation, type of product, and the level of severity and risk. But the in-house product liability expert or recall coordinator needs to be familiar with all the various

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options, as well as identifying the possible field resources that could be utilized if such an option is relevant for the type of products produced. Trying to figure all of this out in the midst of a crisis will not only create tensions along with the probability of poor decisions, but more importantly could result in delayed action, which might then increase the company’s exposure to lawsuits. Making the decision to initiate a recall is not an easy decision to make. Aside from consumer products and automotives, where there is government agency reporting requirements, commercial and industrial products have no reporting requirement, so the decision to recall a product is for the most part at the sole discretion of the company itself. If there is a known problem with the product line and the company fails to alert the user or recall the product, such prior knowledge and awareness could prove to be a real liability to the company, and could lead to unfavorable verdicts if the company went to trial in a product liability incident. From the opposite perspective, deciding to initiate a recall can also open the door to problems, because it now becomes a public admission of guilt. You are technically admitting you have a defective product in the field. As a case in point, many years ago a manufacturing client heard from a customer that an electrical commercial display product they had manufactured had supposedly started a fire, but was quickly extinguished. After hearing this the manufacturer ran a number of laboratory tests on the product to determine if there was any possible way the product could short out and start on fire, and no problem was found. Whatever happened in the field had to have been caused by some other means, and the product ended up being a victim of the situation, but not the cause. Nonetheless, the newly created corporate liability team I helped create reviewed the concern and two of the three members thought it would be safer just to recall the 350 products in the field, rather than take any kind of chance. So working with the corporate outside attorney they drafted a recall letter alerting the customers that the product had a potential of starting on fire, and requested that the customers call a special 800 number to make arrangements for the return of the product. One of the recall letters ironically went to a customer whose place of business just went up in flames, and although the cause of the fire was initially unknown, having just received the recall letter and acknowledgement that the product they were on record as having had the potential for starting on fire, they now knew that this was in fact what must have happened and pursued a claim against the manufacturer. It was now going to be difficult to say that the product did not have the potential for starting on fire, after sending a letter to the contrary. Such opportunistic actions can plague many recalls. Once a company publicly admits to having a problem with their product, it can open the door to all kinds of claims and even fraud. A water heater company initiated a recall and announced that one of their products was defective and had the potential for starting fires, and received a claim stating the water heater was responsible for burning down the claimant’s barn. After conducting a very intense investigation it was determined that the claimant probably burned his own barn down, and got one of the water heaters from a scrap site and placed it in the barn alleging it was the cause of the fire.

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13.1 ESTIMATING THE ECONOMIC IMPACT OF PRODUCT RECALLS Companies facing a product recall typically incur a number of costs. For expository purposes, these costs may be classified into direct and indirect. Direct costs often include the following: † † † † †

Refunds and repair costs, Notification costs, Additional labor costs, Disposal costs, and Lost inventory value.

Indirect costs may include: † † † † † † † † † † †

Damage to reputation, Loss of future sales, Future testing to prevent similar problems, Costs associated with the altering of the production process and restructuring, Use of management time and diversion from business, Legal and regulatory costs, Exposure to future liability for personal injury, Medical monitoring costs, Punitive damages, Increases in future insurance costs, and The impact of uncertainty.

Uncertainty can, for example, reduce a company’s value because it can increase the discount that the market applies to the future cash flows generated by the company.

13.2 “MADE IN CHINA” RECALLS OF 2007 Throughout 2007, the front pages of newspapers were filled with stories of toys contaminated with lead, tainted pet food, and toothpaste laced with antifreeze. According to the press, a large number of these recalled products were connected to Chinese manufacturers, and 2007 was dubbed “the year of China recalls.” These stories raised numerous questions about the present and future magnitude of the “China recall” problem. In 2007 the CPSC obtained the largest number of voluntary recalls (472) in the last 10 years. These recalls involved 110 million product units, including 2.4 million magnetic play sets posing severe injury hazards and 1.5 million children’s wooden toys

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Figure 13.1 2007 U.S. consumer product recalls1 (percent of recalls by country of manufacture).

posing a lead poisoning hazard to children. In total, the CPSC obtained 1031 corrective actions (including recalls and other actions to keep unsafe products from consumers). To evaluate the assertions made in the popular press, it is useful to consider the recent recall activity in light of history. Although 2007 saw more consumer product recalls than previous years, consumer product recalls had been on the rise for the past several years. In 2007 this trend accelerated. The trend within the toy industry, however, appeared to be different. Although the number of toy recalls had been relatively stable over the last two decades, there was a sharp spike in toy recalls in 2007. China’s share of U.S. toy recalls also rose significantly—in fact, China-related toy recalls accounted for nearly all toy recalls in 2007 (Figs 13.1 and 13.2). During 2007, the presence of potentially hazardous levels of lead was the leading cause of recalled consumer products manufactured in China. The number of consumer product recalls related to potentially hazardous levels of lead has grown exponentially since 2000. The lead hazard accounted for 30 percent of the Chinese-made products recalled in 2007. In 2007, a large number of the consumer product recalls for lead hazards were initiated because of lead in paint (used on toys, other children’s products, and so on) and lead in jewelry. The recalls were due to a fear of the potential toxicity of lead, especially to children, if ingested. Although recalls of Chinese-made toys have been rising in recent years, the reason for the recalls often originates outside of China. According to one academic study published in September 2007, most of the recalls of toys manufactured in China during 2007 were not due to manufacturing problems originating in China, but rather design problems originating outside of China.

1

Analysis based on CPSC data under the “manufactured in” category for 2007.

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Figure 13.2 2007 U.S. toy recalls2 (percent of recalls by country of manufacture).

In addition to the United States, recalls were also at record levels in most of the rest of the world in 2007. Half of all dangerous products seized by European customs and product safety authorities in 2007 came from China, according to the European Commission. The European Union flagged 1605 dangerous products in 2007—up 53 percent from 1051 the previous year, according to national authorities in the EU’s 27 nations. Toys sounded a quarter of the EU’s rapid alerts, followed by cars and electrical appliances. “More than one out of three products notified was either a toy or a childcare article, showing the importance that market surveillance authorities place on checking this category,” the EU said in a statement. An EU executive said this reflected the huge volume of Chinese trade—about 80 percent of all toys come from China—and tighter checks on products from China. Chinese authorities told EU regulators they were investigating the companies, and removed the export licenses of half the Chinese manufacturers involved in the recalls, but the Chinese agencies were unable to trace the origins of about one-third of the products coming out of their own country.

13.3 IMPLEMENTING A RECALL When it comes time to initiate a recall there will be a number of actions on which the recall team will need to focus, a preflight checklist per se: †

2

Assessing the Scope of the Recall. How many products are involved in the recall? Where are the products? How is the recall going to be handled internally and externally?

Analysis based on CPSC data under the category “toys” using description “China” in the “manufactured in” category for 2007.

13.4

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Identifying the Affected Product(s). What specific products are involved in the recall, model numbers, manufacturing dates, and specific identifications that separate the affected products from the rest of the same product line? Investigating and Identifying the Cause of the Problem. How was this defective condition created? How is it being prevented from ever happening again? Determining How the Customers or End-users Are Going to be Notified. Are letters being sent out? If so, how (certified, and so on)? Is the recall letter being drafted by an attorney? Are owners going to be called? Are advertisements or announcements going out or being posted? Determining the Mechanics of the Exchange. How are the defective products going to be returned? How will the customers receive the replacements? Identifying Whether the Recall Falls Under the Jurisdiction of Any Government Agency. Is this a consumer product that must be reported to the CPSC? Is it automotive related and governed by the NHTSA? If Damage Claims Surface During the Recall Effort, Determining How They will be Handled/Processed. Will damage claims automatically be accepted and customers compensated, or will they be turned over to someone for investigation? If so, who, and how will they be investigated? Determining the Timeline for the Recall and Replacement Efforts. How long is the recall expected to take? If defective products are going to be replaced, when will the replacements be ready? Determining How the Costs of the Recall will be Handled. Will the costs be covered by any supplier, subcontractor, or insurance company. Determine the Company/Brand Damage and What Needs to be Done to Restore the Image. Is the recall going to attract negative media attention, or possibly turn customers off to the product line or company? If so, what will the plan be to turn a negative incident into something positive?

These are just some of the many issues that have to be reviewed before a company decides to launch a recall.

13.4 DEVELOPING A PROCEDURE Once the corporation has decided on the in-house product liability expert or recall coordinator, and the expert along with the corporate team have decided how they intend to address the possibility of recalls, the process needs to be documented in a procedure for the rest of the management team to understand. What would the scope of the procedure involve or include? What types of situations would fall under the guidelines of the recall procedure and be controlled by the expert or corporate team, versus other situations that would routinely be handled by quality and manufacturing, or customer service, and just be corrected in the plant or repaired in the field, or having the product returned from the field and replaced?

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BOX 13.1

RECALL PROCEDURE

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As an option, you could decide to classify the severity of a defective condition discovered so that executive management instantly realizes the seriousness of the product condition. This could relate to a situation about which the company has just gained knowledge from the field, or a hazardous situation it discovered out on the production line. Identify the type of recall you are going to initiate. Is the company going to request that the product be returned, or will it be repaired in the field, or is the company merely alerting the customer to a possible hazardous condition just discovered, along with supplying direction to the customer on how the product should be handled and the hazard avoided? The following procedure (Box 13.1) merely serves as an example of how such a procedure could be laid out, along with the procedural steps that would be taken to implement it.

13.5 THE TYLENOL RECALL One of the earliest highly publicized recalls was the Tylenol recall of 1982. Seven people in the Chicago area died after ingesting Extra Strength Tylenol medicine capsules that had been laced with potassium cyanide poison. Johnson & Johnson, the parent company of McNeil, distributed warnings to hospitals and distributors and halted Tylenol production and advertising. On October 5, 1982, it issued a nationwide recall of Tylenol products; an estimated 31 million bottles were in circulation. The company also advertised in the national media for individuals not to consume any products that contained Tylenol. When it was determined that only capsules were tampered with, they offered to exchange all Tylenol capsules already purchased by the public with solid tablets. In the first week of the crisis Johnson & Johnson established a 1-800 hot line for consumers to call. The company used the 1-800 number to respond to inquiries from customers concerning safety of Tylenol. They also established a toll-free line for news organizations to call and receive pretaped daily messages with updated statements about the crisis. Several major press conferences were held at corporate headquarters. Within hours an internal video staff set up a live television feed via satellite to the New York metro area. This allowed all press conferences to go national. Jim Burke got more positive media exposure by going on 60 Minutes and the Donahue show and giving the public his command messages. Johnson & Johnson communicated their new triple safety seal packaging—a glued box, a plastic sear over the neck of the bottle, and a foil seal over the mouth of the bottle, with a press conference at the manufacturer’s headquarters. Tylenol became the first product in the industry to use the new tamper-resistant packaging, just six months after the crisis occurred. At the time of the scare the market share of Tylenol collapsed from 35 percent to 8 percent, and marketing experts predicted the brand would never recover, but it rebounded quickly, a move credited to Johnson & Johnson’s prompt and aggressive reaction. In November it reintroduced capsules, but in a new, triple-sealed package,

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coupled with heavy price promotions, and within years Tylenol had become the most popular over-the-counter analgesic in the United States. Scholars have come to recognize Johnson & Johnson’s handling of the Tylenol crisis as the example for success when confronted with a threat to an organization’s existence. T. Berge, author of the book The First 24-Hours, stated “The Tylenol crisis is without a doubt the most exemplary case ever known in the history of crisis communications. Any business executive, who has ever stumbled into a public relations ambush, ought to appreciate the way Johnson & Johnson responded to the Tylenol poisonings. They have effectively demonstrated how major business has to handle a disaster.”

13.6 GOVERNMENT AGENCIES INVOLVED WITH CERTAIN PRODUCT RECALLS Products sold in the United States may be subject to the jurisdiction of and possible reporting requirements of a variety of agencies, each with its own interpretive regulations. The CPSC, for example, has jurisdiction over consumer products including toys, appliance, furniture, and playground equipment. Automobiles, trucks, motorcycles, and their component parts are within the jurisdiction of the Department of Transportation, as related by the NHTSA. The Bureau of Alcohol, Tobacco, and Firearms enforces federal laws and regulations relating to alcohol, tobacco products, firearms, and explosives. Food, drugs, cosmetics, radiation-related products, medical devices, and veterinary medicines are within the jurisdiction of the Food and Drug Administration. The Environmental Protection Agency has jurisdiction over pesticides, rodenticides, and fungicides. The U.S. Coast Guard has jurisdiction over boats and other watercraft, including personal watercraft. Each of these agencies has its own regulations and guidelines that affect safety issues. 13.6.1

Consumer Product Safety Commission (CPSC)

Companies that produce and sell consumer products within the United States must be aware of their affirmative obligations relative to information they are required to collect, maintain, evaluate, and report regarding safety issues and the substantial adverse consequences, of a company’s delinquency with respect to these obligations. The U.S. CPSC is an independent federal regulatory agency. The CPSC was created in 1972 by Congress under the Consumer Product Safety Act and began operating in 1973. In enacting the Consumer Product Safety Act, Congress directed the CPSC to protect the public “against unreasonable risks of injuries associated with consumer products.” The CPSC is an independent U.S. Government agency, which does not report to, and is not a part of any other department or agency. The agency has jurisdiction over approximately 15,000 types of consumer products used in the home, schools, and recreation. Examples include toys, clothing, appliances, furniture, playground equipment, and sports equipment.

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13.6.1.1 SEC. 37 [15 U.S.C. 2084] (a) If a particular model of a consumer product is the subject of at least three civil actions that have been filed in Federal or State court for death or grievous bodily injury which in each of the 24-month periods defined in subsection (b) result in either a final settlement involving the manufacturer or a court judgment in favor of the plaintiff, the manufacturer of such product shall, in accordance with subsection (c), report to the Commission each such civil action within 30 days after the final settlement or court judgment in the third of such civil actions, and, within 30 days after any subsequent settlement or judgment in that 24-month period, any other such action. 13.6.1.2 Reporting Requirements A. Section 15 Reports: Section 15(b) of the Consumer Product Safety Act establishes reporting requirements for manufacturers, importers, distributors, and retailers of consumer products. Each must notify the Commission immediately if it obtains information which reasonably supports the conclusion that a product distributed in commerce (1) fails to meet a consumer product safety standard or banning regulation, (2) contains a defect which could create a substantial product hazard to consumers, (3) creates an unreasonable risk of serious injury or death, or (4) fails to comply with a voluntary standard upon which the Commission has relied under the CPSA. Companies that distribute products that violate regulations issued under the other laws that the Commission administers— the Flammable Fabrics Act, 15 U.S.C. § 1193–1204; the Federal Hazardous Substances Act, 15 U.S.C. § 1261–1278; the Poison Prevention Packaging Act, 15 U.S.C. § 1471–1476; and the Refrigerator Safety Act, 15 U.S.C. § 1211–1214—must also report, if the violations may also constitute product defects that could create a substantial risk of injury to the public or may create an unreasonable risk of serious injury or death. The Commission has issued an interpretive regulation, 16 C.F.R. Part 1115, that further explains a reporting company’s obligations. In enacting Section 15(b), Congress intended to encourage the widespread reporting of potential product hazards. In addition to assisting the Commission to discover substantial product hazards, reporting would identify risks of injury that the Commission could address through voluntary or mandatory standards, or information and education. Although CPSC uses sources other than company reports to identify potentially hazardous products, reporting by companies under section 15 can provide the most timely and effective source of information about such products. This is because firms often learn of potential product safety problems at an early stage. For this reason, companies involved in the manufacture, importation, distribution, or sale of consumer products should develop a system for maintaining and reviewing information about their products that might suggest a product defect or unreasonable risk of serious injury or death. Such information includes consumer complaints, warranty returns, insurance claims or payments, product liability lawsuits, reports of production problems, product testing or other critical analyses of products, and the like. Reporting a product to the Commission under Section 15 does not automatically mean that the Commission will conclude that the product creates a substantial product hazard or that corrective action is necessary. The CPSC staff works with the reporting

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firm to determine if corrective action is appropriate. Many of the reports received require no corrective action because the staff concludes that the reported product defect does not create a substantial product hazard. What and Where to Report A company should file its report with the Division of Recalls and Compliance. The report may be filed by mail, telephone (301-504-7913), or electronically through the CPSC web site (www.cpsc.gov) or fax (301-504-0359). A company should assign the responsibility of reporting to someone with knowledge of the product and of the reporting requirements of Section 15. He or she should have the authority to report to CPSC or to quickly raise the reporting issue to someone who does. Reporting firms should be prepared to provide the information described below. However, no company should delay a report because some of this information is not yet available. The following information should be transmitted: † †

†

† † †

†

Description of the product; Name and address of the company, and whether it is a manufacturer, distributor, importer, or retailer; Nature and extent of the possible product defect or unreasonable risk of serious injury or death; Nature and extent of injury or possible injury associated with the product; Name, address, and telephone number of the person informing the Commission; If available, the other information specified in Section 1115.13(d) of the Commission’s regulations interpreting the reporting requirements; A timetable for providing information not immediately available.

Retailers and distributors may satisfy their reporting obligations in the manner described above. Alternatively, a retailer or distributor may send a letter to the manufacturer or importer of a product describing the risk of injury or death or the defect associated with the product or its failure to comply with an applicable regulation and forward a copy of that letter to the Division of Recalls and Compliance. A distributor or retailer receiving product hazard information from a manufacturer or importer or other source must report to CPSC unless the firm knows the Commission has been adequately informed of the defect, failure to comply, or risk. When to Report Section 15 requires firms to report immediately. This means that a firm should notify the Commission within 24 hours of obtaining information described in Section A (Section 15 Reports) above. Guidelines in 16 C.F.R. §1115.12 help determine whether a product defect exists, whether a product creates an unreasonable risk of serious injury or death, and whether a report is necessary or appropriate. A company must report to the Commission within 24 hours of obtaining reportable information. The Commission encourages companies to report potential substantial product hazards even while their own investigations are continuing. However, if a company is uncertain whether information is reportable, the firm may spend a

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reasonable time investigating the matter. That investigation should not exceed 10 working days unless the firm can demonstrate that a longer time is reasonable in the circumstances. Absent such circumstances, the Commission will presume that, at the end of 10 working days, the firm has received and considered all information which would have been available to it had a reasonable, expeditious, and diligent investigation been undertaken. The Commission considers a company to have obtained knowledge of product– safety-related information when that information is received by an employee or official of the firm who may reasonably be expected to be capable of appreciating the significance of that information. Once that occurs, under ordinary circumstances, five working days is the maximum reasonable time for that information to reach the chief executive officer or the official assigned responsibility for complying with the reporting requirements. The Commission evaluates whether or when a firm should have reported. This evaluation will be based, in part, on what the company actually knew about the hazard posed by the product or on what a reasonable person, acting under the circumstances, should have known about the hazard while exercising due care. Thus, a firm is deemed to know what it would have known had it exercised due care in analyzing reports of injury or consumer complaints, or in evaluating warranty returns, reports of experts, in-house engineering analyses, or other information. Section 2069 of the Consumer Product Safety Act provides for civil penalties. In 2005 the maximum allowable fines were increased to $8000 per violation and a maximum of $1.825 million for any related set of violations. It has been held that there is a violation for each product sold and not just those that caused injury or that failed. See United States v. Mirama Enterprises, Inc., 387 F.3d 983 (9th Cir. 2004). Therefore, the fines can be significant where there have been thousands of products sold. The information contained in this section represents only a small portion of what is available from the CPSC website, http://www.cpsc.gov/index.html. As shown in Tables 13.1 and 13.2, companies make the mistake of not reporting defective product to the Commission for multitudes of reasons, including failure to realize they are selling a product that falls under the control of the CPSC; believing that by initiating a recall on their own they no longer have to report the problem to the CPSC; failing to recognize they have reached the point where they must now report an issue to the Commission; failing to have someone internally responsible for monitoring such an activity; and numerous other errors and oversights. As shown, the fines can be very high. Therefore, whenever in doubt, the company should check with the CPSC to determine if they have a responsibility to report, or hire the services of an expert in the field. 13.6.1.3

CPSC Recommendations for Handling Recalls

Developing a Company Policy and Plan to Identify Defective Products Companies whose products come under the jurisdiction of the CPSC should consider developing an organizational policy and plan of action if a product recall or similar

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TABLE 13.1 Companies Fined by the CPSC in 2006 Document Title and Date

Fine, $

Act

Product Type

Firm

Family Dollar Inc. to Pay Civil Penalty for Failure to Report Hazardous Electric Blankets (July 13, 2006) Tiffany and Company Agrees to Pay Civil Penalty for Failure to Report Hazardous Infant Teether Rattles (June 28, 2006) West Bend Housewares LLC to Pay $100,000 Civil Penalty for Failure to Report Hazardous Coffeemaker Carafes (May 5, 2006) Acuity Brands Inc. to Pay $700,000 Penalty for Failing to Report Hazardous Lights (March 9, 2006) Kansas Firms to Pay $600,000 Civil Penalty for Selling Banned Fireworks (December 8, 2005) SMC Marketing Corp. to Pay $500,000 Penalty for Failing to Report Fire Hazard with Floor Fans (December 9, 2005)

100,000

CPSA

Electric blankets

Family Dollar

262,500

CPSA

Pacifiers/ rattles

Tiffany

100,000

CPSA

Coffeemakers

West Bend

700,000

CPSA

Lights

Acuity Brands

600,000

FHSA

Fireworks

Winco Fireworks

500,000

CPSA

Fans

SMC Marketing

action becomes necessary, whether it involves the CPSC or another government agency. This policy and any related plans should focus on the early detection of product safety problems and prompt response. Designating a Recall Coordinator Designating a company official or employee to serve as a recall coordinator is a significant step that a firm can take to meet its TABLE 13.2 Companies Fined by the CPSC in 2007 Document Title and Date

Fine, $

Act

Product Type

Firm

Fisher-Price Fined $975,000 for Failing to Report a Serious Choking, Aspiration Hazard with a Popular Children’s Toy (March 1, 2007) Nexgrill Industries Inc. to Pay $300,000 Civil Penalty for Failure to Report Hazardous Gas Grills (January 12, 2007) Hoover Company Fined $750,000 for Failing to Report Fire Hazard with Vacuum Cleaners (January 12, 2007) Black Dog Tavern Company Fined for Failing to Report Sales of Previously Recalled Children’s Sweatshirts (December 15, 2006)

975,000

CPSA

Children’s toys

FisherPrice

300,000

CPSA

Gas grills

Nexgrill

750,000

CPSA

Vacuum cleaners

Hoover

50,000

CPSA

Clothing (children)

Black Dog Tavern

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product safety and defect reporting responsibilities. Ideally, this coordinator has full authority to take the steps necessary (including reporting to the Commission) to initiate and implement all recalls, with the approval and support of the firm’s chief executive officer. The recall coordinator should have the following qualifications and duties: †

†

†

† †

†

Knowledge of the statutory authority and recall procedures of the Consumer Product Safety Commission; Ability and authority to function as the central coordinator within the company for receiving and processing all information regarding the safety of the firm’s products. Such information includes, for example, quality control records, engineering analyses, test results, consumer complaints, warranty returns or claims, lawsuits, and insurance claims. Responsibility for keeping the company’s chief executive officer informed about reporting requirements and all safety problems or potential problems that could lead to product recalls; Responsibility for making decisions about initiating product recalls; Authority to involve appropriate departments and offices of the firm in implementing a product recall; Responsibility for serving as the company’s primary liaison person with the CPSC.

Role of the Recall Coordinator At the outset, the recall coordinator should fully review the company’s product line to determine how each product will perform and fail under conditions of proper use and reasonably foreseeable misuse or abuse. Through research and analysis, product safety engineers can identify the safety features that could be incorporated into products that present safety risks to reduce their potential for future injury. The company should institute a product identification system if one is not now in use. Model designations and date-of-manufacture codes should be used on all products, whether they carry the company’s name or are privately labeled for other firms. If a product recall is necessary, this practice allows the company to easily identify all affected products without undertaking a costly recall of the entire production. Similarly, once a specific product has been recalled and corrected, a new model number or other means of identification used on new corrected products allows distributors, retailers, and consumers to distinguish products subject to recall from the new items. Until a production change can be made to incorporate a new model number or date code, some companies have used sticker labels to differentiate products that have been checked and corrected from recalled products. Records Maintenance The goal of any product recall is to retrieve, repair, or replace those products already in consumers’ hands as well as those in the distribution chain. Maintaining accurate records about the design, production, distribution, and marketing of each product for the duration of its expected life is essential for a

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company to conduct an effective, economical product recall. Generally, the following records are key both to identifying product defects and conducting recalls: †

†

†

†

†

Records of Complaints, Warranty Returns, Insurance Claims, and Lawsuits. These types of information often highlight or provide early notice of safety problems that may become widespread in the future. Production Records. Accurate data should be kept on all production runs—the lot numbers and product codes associated with each run, the volume of units manufactured, component parts or substitutes use, and other pertinent information that will help the company identify defective products or components quickly. Distribution Records. Data should be maintained as to the location of each product by product line, production run, quantity shipped or sold, dates of delivery, and destinations. Quality Control Records. Documenting the results of quality control testing and evaluation associated with each production run often helps companies identify possible flaws in the design or production of the product. It also aids the firm in charting and sometimes limiting the scope of a corrective action plan. Product Registration Cards. Product registration cards for purchasers of products to fill out and return are an effective tool to identify owners of recalled products. The easier it is for consumers to fill out and return these cards, the greater the likelihood the cards will be returned to the manufacturer. For example, some firms provide preaddressed, postage-paid registration cards that already have product identification information, for example, model number, style number, and special features printed on the card. Providing an incentive can also increase the return rate. Incentives can be coupons towards the purchase of other products sold by the firm, free accessory products, or entry in a periodic drawing for a product give away. The information from the cards then needs to be maintained in a readily retrievable database for use in the event a recall becomes necessary.

13.6.1.4 CPSC Recall Process Checklist The Office of Compliance at the U.S. CPSC has prepared the following recall checklist to help manufacturers, importers, distributors, and retailers conduct an effective and comprehensive product safety recall. This list is a guide only to assist recalling firms in removing products from all stages of the distribution process. Not all items will necessarily apply in all recalls. Recalling firms may obtain further guidance from the Office of Compliance or at [email protected]. Information can also be found at www.cpsc.gov. Production † †

Identify the defect/safety issue. Stop production.

274 † † † † † † † †

POST SALE DUTIES TO WARN AND RECALLS

Isolate the inventory to be recalled. Determine the appropriate remedy. Test the replacement/repair. Repair/dispose of units on hand and units returned under the recall. Discuss all aspects with CPSC Compliance staff. Redesign future production to eliminate the hazard. Change the model/serial number for the redesigned product. Where product changes are made to existing products, label them so as to distinguish them from recalled products.

Retailer (Products at the Retail Level) † †

†

† †

† † † †

† †

†

† † † †

Give retailers notice of recall well before the public announcement. Give retailers information to readily identify the recalled products, for example, UPC codes, date codes, model numbers, and any other critical identifying information. Give retailers information on any in-transit shipments that may contain the recalled product. Ask retailers to stop sale of the recalled product. Ask retailers to isolate the inventory of the recalled product and give them instructions on how to return and/or dispose of these products so they are not released for sale. Ask retailers to block sale at the register. Provide retailers with recall posters to display in conspicuous locations. Inform retailers of remedy, for example, recall, repair, replace, or refund. Work with retailers on the disposition of consumer returns, for example, return to manufacturer, disposal, or repair. Ask retailers to maintain an accurate accounting of product inventory. Ask retailers to review customer records and identify likely purchasers using extended warranties, credit card customers, parts customers, catalog sales, and so on. Work with retailers on how they will receive credit and/or refunds for recalled products. Provide special “retailers-only” phone number for retailer inquiries. Anticipate the CPSC investigator monitoring recall at retail stores. Send notice to consumers. Conduct a Joint Press Release (all language must be worked out with CPSC Compliance staff); which – Forms the basis for all consumer notice; – Identifies the program as a recall;

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– Includes all pertinent information in the press release, including the number of incidents and injuries and a description of each; – Gives a clear, unambiguous description of the defect and hazard – Provides a toll-free number; – Describes the recalled product and model number(s); – Includes a color photo or graphic of the product/hazard; – Includes incident information or injury information; – Describes how to obtain a remedy, for example, call the manufacturer, return to the retailer, and so on; – Includes dates of production and sale; – Includes the recalling firm’s website address; – Identifies where the product was sold (lists the top retailers); – Provides the recalling firms and CPSC’s contact name and phone number for media inquiries; – Prepare questions and answers for media and consumer inquiries in consultation with CPSC. Direct Mail (All Language must be Worked out with CPSC Compliance Staff) †

† † †

† † † †

Identify customers who have the product in advance of public notice and mail them a notice of recall. Include all pertinent information related to the recall. Include a picture from poster, press release, or website. Include as a heading on the notice and on the outside of the envelope “Important Safety Message” or “Safety Recall” (in red). Include a toll-free number and website address. Notify consumers through an email. Give consumers the ability to obtain a remedy through email notification. Provide authorization for return shipping where applicable.

Toll Free Number †

† † † † † †

Assure a toll free number will be available and operational before the recall is announced. Assure the number is operational in all areas of the United States. Assure there are a sufficient number of operators to handle calls. Assure there are a sufficient number of phone lines. Assure there are reasonable hours of operation. Assure the number has an overload capability. Assure access for nontouch-tone phones.

276 †

† † †

†

†

†

POST SALE DUTIES TO WARN AND RECALLS

Determine the need for non-English speaking operators or recorded information. Allow the CPSC to review all scripts before implementation. Determine if you will have an automated or live operator system. Assure contingency plans for use of additional 800 lines and operators in the event the system is overloaded (especially during the first week of the public announcement). Allow the CPSC to monitor use and responses—find out how consumers heard about the recall. Identify a key company representative who can handle “special” consumer needs. Maintain the toll-free number during recall, and afterwards forward calls to the firm’s number.

Video News Release (VNR)—Language Follows Agreed-Upon Press Release Language † † † † † †

†

†

Guidelines are located at the CPSC website www.cpsc.gov. The CPSC and recalling firm usually have a spokesperson in the VNR. The recalling firm pays the costs. The recalling firm chooses a production company. The CPSC must review and approve the script. The recalling firm obtains and provides monitoring and a tracking report on usage. The recalling firm purchases satellite time for release in coordination with the CPSC. The recalling firm provides multiple copies of tapes to the CPSC for dissemination.

Paid Advertising † † † † † †

It should include all pertinent information related to the recall. It may address a general or targeted audience It should be placed in newspapers, magazines, trade papers, and so on. It should assure prominent placement of advertisements—use of color. The CPSC must review and approve the text. It must include a toll-free number/website address.

Pediatrician or Specialty Posters † †

They should include all pertinent information related to the recall. Organizations should be used who conduct mailing.

13.6

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GOVERNMENT AGENCIES INVOLVED WITH CERTAIN PRODUCT RECALLS

277

Approximately 40,000 – 70,000 pediatricians need to be targeted. The CPSC must review and approve the text. A toll-free number/website address must be included. The posters should be disseminated when the recall is announced, or closely thereafter.

Recall (In-Store) Posters † † † † † † † †

They should include all pertinent information related to the recall. They should be big, bold, and in color. They should include a photo/graphic or picture of the product hazard. They should include a toll-free number/web site address. The CPSC must review and approve the text. Consider tear-off sheets with the toll-free number/web site address. They must be in stores before the joint press release is issued. Print on the poster “display to date” (minimum 120 days) (for store clerks).

Website † †

† † † †

†

Guidelines can be located at the CPSC website, www.cpsc.gov. Include a reference to recall in a prominent location on the home page/first entry point. Include a link to the joint press release. Include interactive registration of the recalled product for remedy. The CPSC must review and approve the text. Be sure the recall notice on the website is operational at the time of the recall announcement. Maintain the site during the course of the recall and thereafter.

Other Notice Forms † † † † †

† † † †

Include recall information in the product inserts. Include a recall notice in accessory parts. Include a recall notice in bills sent to the distribution chain/consumers. Include a recall notice in credit card statements. Send a direct mail notice to customers whose names are known to the firm through customer service inquiries, parts orders, warranty card/product registration with the company, and catalogs. Provide a prepaid mailer for the return of the recalled product. Provide in-home repair by an authorized dealer. Provide in-home repair with detailed instructions for consumer repair. Provide bounties for return of recalled products.

278 †

†

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Provide incentives for return of recalled products, for example, free gift, discount coupon, and so on. Consult with CPSC staff prior to the release of any documents related to the recall.

Key Points to Remember † †

† † † † † †

†

Remedy should be easy for the consumer so as to encourage correction. Submit timely monthly progress reports on the number of products corrected and notification measures implemented to CPSC, and continually review for additional actions. Support CPSC publicity efforts. Be responsive to individual customer needs. Designate a key company official to take care of special needs. Stay on message (with language agreed to in joint press release). Do not blame the consumer. Consult frequently with Compliance staff working with you on the recall to avoid problems. Be creative and original in an effort to reach as many consumers and other owners of the recalled product.

13.6.2

The National Highway Traffic Safety Administration (NHTSA)

(Taken in part from the NHTSA Safety Recall Compendium) In 1966, Congress held a series of highly publicized hearings regarding highway safety, passed legislation to make installation of seat belts mandatory, and created several predecessor agencies that would eventually become the NHTSA, including the National Traffic Safety Agency, the National Highway Safety Agency, and the National Highway Safety Bureau. The NHTSA was officially established in 1970 by the Highway Safety Act of 1970. The NHTSA is the agency within the U.S. Department of Transportation responsible for motor vehicle safety. Under Chapter 301 of Title 49 U.S.C. [formerly the National Traffic and Motor Vehicle Safety Act, as amended (the Act)], NHTSA is responsible for the administration of national safety recalls by manufacturers or distributors of motor vehicles and items of motor vehicle equipment where a safety defect or noncompliance with a Federal motor vehicle safety standard (FMVSS) has been determined. Safety recalls are conducted in accordance with the Act and Federal regulations. The agency also conducts investigations of alleged safety defects and tests for compliance with FMVSS. 13.6.2.1 When to Report A manufacturer who has determined that a safety defect or noncompliance exists must report such a determination to NHTSA within

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five working days. A manufacturer need not have identified the cause, scope, or remedy in order to make a determination that a safety defect or noncompliance exists, at least in some vehicles or items of motor vehicle equipment. If part of the information that is required to fully describe the recall is unknown, notification to the agency must still be made with the existing information within five working days. The remaining information is to be provided as it becomes available.

13.6.2.2 Who Should Report Each manufacturer of a motor vehicle has recall responsibility for any safety-related defect or any noncompliance determined to exist in a vehicle or in any item of original equipment. The manufacturer of an item of motor vehicle equipment in which a safety defect or noncompliance is determined to exist (1) is responsible for notifying the vehicle manufacturer, and (2) with respect to an item of replacement equipment (including tires) has recall responsibility for the equipment containing the safety defect or noncompliance. [49 CFR Part 579, “Defect and Noncompliance Responsibility.”] If an item of original equipment is determined to contain a safety defect or noncompliance and is installed in the vehicles of more than one manufacturer, then the equipment manufacturer must file a defect/noncompliance information report with respect to the equipment and each vehicle manufacturer must file a defect/ noncompliance information report with respect to its vehicles containing that equipment. Either the vehicle manufacturer or the manufacturer of the equipment containing the defect or noncompliance can conduct the actual recall and submit the required quarterly reports. In the case where the item of original equipment containing a defect or noncompliance is sold to only one vehicle manufacturer, the filing of the defect/ noncompliance information report, performance of the recall, and the filing of the quarterly reports by either manufacturer is considered compliance by both. However, if the original equipment manufacturer also sells the item as replacement equipment, then that equipment manufacturer must also file and conduct a recall for those items of replacement equipment. [Part 573.3 49 CFR.] This means that a vehicle manufacturer has the ultimate responsibility for what is installed in the vehicle. A supplier of the original equipment, which may contain either a defect or a noncompliance, can conduct the recall for the vehicle manufacturer. However, if the supplier also sells the item of motor vehicle equipment as replacement parts or assemblies, then that manufacturer must file a 49 CFR Part 573 report and conduct a recall for those items of replacement equipment. The remedy for the recall must involve both the inventory of recalled, including unsold vehicles or items of motor vehicle equipment, and the population of vehicles or items of motor vehicle equipment sold to purchasers. If the recall remedy provided for the product already distributed or sold is different than the production remedy, the production remedy should be described in the Defect/Noncompliance Information Report. A manufacturer can remedy a defect or noncompliance by refunding, replacing, or repairing the product. Refunds are to be for the purchased price, less reasonable depreciation for use.

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Replacements are to be for a comparably valued product. When the product is remedied, the remedy must be timely and performed without charge. The performance and/or compliance of the remedy should be established prior to implementing the remedy campaign. If the remedy involves a repair or replacement, the manufacturer is expected to have established not only the suitability of the remedy when the repair is made, but also the durability of the remedy when the vehicle or item of motor vehicle equipment is used. The manufacturer must ensure an effective parts supply so that the product can be remedied as soon as possible. Because the underlying purpose of a safety recall is to minimize the safety risk, it is important to maximize the effectiveness and timeliness of the recall. Vehicles and items of motor vehicle equipment that are subject to a recall, but not as yet sold to consumers, should be removed from sale as quickly as possible. As specified in 49 U.S.C. § 30112, 30116, and 30120, the recalled product cannot be sold until remedied. With respect to motor vehicle recalls, manufacturers should encourage their franchise dealers to ensure that the manufacturer’s used vehicles have all applicable recall work completed before resale to the public. It is suggested that for recalls in which the replacement or repair is critical, the manufacturer develop an easily visible marking or identification scheme for the repaired/replaced component or assembly. This will allow the manufacturer, dealer, purchaser, and owners to readily determine whether the recalled item has been replaced or repaired. Also, consideration should be given to packaging the corrected components/assemblies, as well as the remedial parts, distinctly to assist service personnel in ensuring that the correct parts are used. Finally, many manufacturers use a self-adhesive label to attach to the vehicle or item of motor vehicle equipment, to denote that the recall remedy work was completed. Generally each label is color coded and contains the manufacturer’s recall code, the dealer code for the dealer completing the recall, the date the recall work was completed, and, if possible, the manufacturer’s toll-free telephone number. 13.6.2.3 The Notification Letter Federal Regulation 49 CFR Part 577, entitled “Defect and Noncompliance Notification,” specifically requires notification to purchasers, owners, and lessees where the manufacturer or the NHTSA administrator has determined a defect or noncompliance exists in the manufacturer’s vehicles or items of motor vehicle equipment. The intent of this notification requirement is to inform owners or purchasers of motor vehicles or items of motor vehicle equipment of a safety-related defect or noncompliance, the consequences, and a description of the corrective action. The notification is also intended to “effectively motivate” the owner, purchasers, or lessees to have their vehicle or item of motor vehicle equipment inspected and corrected as soon as possible. The first sentence of the notification letter is prescribed by regulation and must be used verbatim. The language and form of the second sentence of the letter is specified also and is provided for both defect and noncompliance type notifications. The appropriate

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sentence must be selected and provided to owners and purchasers verbatim. [49 CFR Part 577.5(b) and (c).] The manufacturer must describe to the owner or purchaser its program for remedying the defect or noncompliance condition and that the remedy will be provided without charge. The description of the program must include the earliest date when the remedy can be made (both instructions and parts availability) and a general description of the actual remedy. If the remedy involves repairing the vehicle or item of motor vehicle equipment, a description must be provided of the repair work and time required to perform the work. Where the remedy is to replace the vehicle or equipment item, a description of the replacement must be provided. If the remedy involves refunding the purchase price of the vehicle or equipment item less depreciation, a description of how the depreciation was assessed must be given. [49 CFR Part 577.5(g)(1).] Owners or purchasers must be advised in the letter that a complaint can be submitted to the NHTSA administrator if the manufacturer has failed or is unable to remedy the defect or noncompliance condition without charge or within a reasonable amount of time. [49 CFR Part 577.5(g)(1)(vii).] The procedure for owners to notify NHTSA must clearly state that if an owner is unable to have the defect or noncompliance remedied without charge within a reasonable amount of time, the owner can notify Administrator National Highway Traffic Safety Administration 400 Seventh Street, SW Washington, DC 20590

or call the toll-free DOT Auto Safety Hotline at 1-888-DASH-2-DOT (1-888-3274236). [49 U.S.C. § 30119.] Under certain conditions, a manufacturer is not required to provide remedy without charge, such as if the vehicle or equipment was first purchased more than eight years before the recall. In such instances, the manufacturer must meet the requirements of 49 CFR Part 577.5(g)(2). A manufacturer’s notification letter cannot include any statement or implication that there is no defect or noncompliance condition, or that the condition does not exist, in the owner’s vehicle or item of motor vehicle equipment. Also, with respect to a safety defect, the manufacturer cannot state or imply that the defect does not relate to motor vehicle safety. [Under 49 CFR Part 577.8.] 13.6.3 Europe’s General Product Safety Directive (GPSD) 2001/95/EC Originally created December 3, 2001, the Directive sets safety requirements for consumer products ranging from sports equipment and household products, to medical device equipment. The Directive empowers member states to establish requirements

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depending on the risk and hazard posed by individual products either being introduced within the European Union or already in circulation. EU-wide rules in effect starting January 2004 are designed to improve the safety of consumer products. The revised GSPD—2001/95/EC, adopted in 2001 and entering into force January 2004 concerns safety controls of all consumer products (except food). It sets safety requirements for consumer products such as sports and playground equipment, childcare articles, lighters, and most household products such as textiles and furniture. The Commission receives around 150 notifications of dangerous products annually, most often associated with risks of choking and suffocation, electric shocks, and fires. The category of products more often notified is toys, followed by electric appliances and products. David Byrne, EU Commissioner for Health and Consumer Protection, said, “For the first time manufacturers have the legal obligation to inform authorities if a product is unsafe. These are recalled and taken off the market. Also for the first time the Commission can now initiate recalls and provisional bans to assure the same level of protection for the entire EU. This is very good news for consumers.” The new rules are as follows: †

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Manufacturers and distributors will now be legally obliged to inform the authorities if they conclude a product they supply is dangerous. They will then have to work with the authorities in tracing dangerous products and taking them off the market. If necessary, companies can be required to organize a product recall. If and when dangerous products are identified, the EU’s powers to order a recall or an emergency ban have been simplified and reinforced. Where a “serious risk requiring rapid action” is identified, the Commission can now impose an emergency ban lasting up to one year. The limit for such bans under the old GPSD was three months. The Commission can also for the first time act on its own initiative to suspend a product. Up to now it could only initiate EU action after a Member States request. Under the new GPSD, products subject to an emergency ban can no longer be exported from the EU to third countries. The new GPSD requires that, as a general rule, information gathered by Member States and the Commission on product safety should be made available to the public. Exceptions are made, however, to prevent the disclosure of information that would undermine the authorities’ market surveillance activities or violate commercial confidentiality rules. Enforcement of product safety rules will become more effective, with better cooperation between national authorities, enhanced emergency powers, and clearer definitions of how the rules apply. The EU rapid alert system for dangerous products (RAPEX) is strengthened. The Commission is to be informed immediately of any product that poses a serious risk and will alert all Member States, while the possibility of linking third countries to the RAPEX system is also foreseen: Romania and Bulgaria have already expressed an interest in joining.

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13.6.3.1 When Does the GPSD Apply? The majority of consumer products are regulated one way or another by specific EU regulations, such as the Toys Directive, the Medical Device Directive, the Pressure Equipment Directive, to name but a few of 20 plus EU directives, which are EU laws. There are also directives regulating the use of dangerous substances, such as flame-retardants used in textiles. Still, there are products and product-related safety aspects of consumer goods that are not addressed by these directives, for which the European Commission has adopted the General Product Safety Directive. Examples of items falling under the GPSD range from ladders, garden tools, textile materials, childcare articles, and playground equipment, to do-it-yourselves kits and more. 13.6.3.2 How is a “Safe” Product Defined? At the heart of the GPSD is the definition of what a safe product is defined as: “any product which, under normal or reasonably foreseeable conditions of use including duration and, where applicable, putting into service, installation and maintenance requirements, does not present any risk or only the minimum risks compatible with the product’s use, considered to be acceptable and consistent with a high level of protection for the safety and health of persons.” The directive applies to new, used, or reconditioned products.

13.6.3.3 Does the GPSD Replace National Requirements? Unlike other single market directives, the GPSD does not attempt to harmonize existing national legislation. It recognizes the validity of national product safety law including national standards in the critical area of the safety of its citizens. In essence, a product manufactured to national requirements and standards is “deemed safe” and will be recognized as safe in that country by the same token. As there may be differences in safety requirements among the EU member states, automatic acceptance of a “safe” product by other countries is not a given. However, a product manufactured to a European (European Norm (EN)) standard recognized under the GPSD is “deemed safe” and will be recognized as safe throughout the EU. Any action by a Member State inspection authority questioning the safety of a product triggers an EU-wide information exchange system known as RAPEX. 13.6.3.4 What are the Implications of the GPSD for U.S. Exporters? For U.S. manufacturers it is important to consider the full range of EU regulatory requirements. First, it is necessary to determine whether or not a product is subject to specific product legislation. For instance, a child’s pacifier that is also intended to be used as a toy would be covered by the Toy Directive and requires a CE mark. However, products or certain aspects not covered by a new approach directive would be subject to the GPSD. Taking the example of the pacifier as a toy, the pacifier as such would be considered safe if manufactured to the specifications of the European harmonized standard. Last but not least, the manufacturer should also look into existing voluntary marks that are widely known and used in the local market and that could be linked to national requirements.

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13.6.3.5 How Does a Company Demonstrate Conformity? A manufacturer is allowed to self-certify that a product is safe in accordance with the GPSD. A self-certification process typically involves risk analysis, test results, and a proven record of safety, all of which should be documented. Although the exact requirements for documentation are not laid out in the directive, it is a commonly accepted procedure to show compliance through documentation should national inspection authorities ask to see it. Absence of documentation may lead to questions about compliance during random inspections. The following will be taken into account to determine safety: †

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The characteristics of the product, including its composition, packaging, instructions for assembly, and where applicable, for installation and maintenance; The effect on other products with which it will be used; The presentation of the product, the labeling, any warnings and instructions for its use and disposal, and any other indication or information regarding the product that might affect use; The categories of consumers at risk when using the product, in particular, children and the elderly.

Other elements that can be taken into account by the manufacturer for conformity assessment include the following: † † † †

Commission guidelines concerning borderline issues; Product safety codes of good practice; The state of the art of the technology; Reasonable consumer expectations concerning safety.

13.6.3.6 Use of EU Standards With the introduction of European voluntary standards in the amended GPSD, the directive adds a new dimension to the notion of product safety by giving “presumption of conformity” to those products manufactured to a European voluntary standard. The difference is that national standards are not recognized outside the country of adoption, whereas European standards, as published by the Commission in its Official Journal, are recognized as EU-wide standards. The latter type of standard can be easily recognized because its number is preceded by EN followed by the code of the national standards body that is required to nationally adopt the EN standard, for example, NF for a French standard and DIN for a German standard. So, for example, NF P 90 503 is a national French standard while EN NF 12790:2002 is a French-adopted EU standard. The advantage of using a European voluntary standard adopted by all EU countries as a national standard is that manufacturers, in theory, have to deal with only one set of standards rather than several national standards to demonstrate that their product is safe. The claims of safety made by the manufacturer made to EU standards will be accepted throughout the EU.

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With input from the European standards organization CEN and member states, the Commission created a proposed list of standards references to be considered as European standards linked to the GPSD. This list was submitted for consultation just before the summer of 2004. Following analysis of the outcome of reactions from stakeholders, Member States, and industry, the European Commission published the references of standards giving presumption of conformity in the Official Journal in early 2004. More lists of EN standards references are likely to follow. Furniture Cribs and cradles for domestic use: Safety requirements—EN 1130–1:1996 Cribs and cradles for domestic use: Test methods—EN 1130–2:1996 Childcare Articles Carry cots and stands—EN 1466:2004 Soothers for babies and young children—EN 1400–1:2002, EN 1400–2:2002, and EN 1400–3:2002 Soother holders—EN 12586:1999 and EN 12586:1999/AC:2002 General Consumer Products Lighters—EN/ISO 9994: 2002 Oil lamps—EN 14059: 2002

13.6.4

What is the Role of the Local Importer?

The importer has to warn the competent authorities about known safety hazards. The importer also has to verify whether the exporter has complied with the different aspects contributing to a “safe product” such as correct labeling, instructions for use in the local language, and so on. It is advisable for either the manufacturer or the importer to keep a record of complaints, if they exist, and to note how any problem was solved. Importers may recall consumer goods, if necessary, or be asked to withdraw them from the market with possible penalties in the case of safety issues, followed by a report to the RAPEX system.

13.6.5

Useful Websites

GPSD directive http://europa.eu.int/comm/consumers/cons_safe/prod_safe/gpsd/index_en.htm RAPEX information exchange between member states http://europa.eu.int/comm/consumers/cons_safe/prod_safe/gpsd/rapex_en.htm

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GPSD list of standards http://europa.eu.int/comm/consumers/cons_safe/prod_safe/standards/ ojc20040424.htm Commission guidance http://europa.eu.int/comm/consumers/cons_safe/prod_safe/gpsd/guidance_ gpsd_en.pdf Competent authorities that need to be notified about safety hazards http://www.prosafe.org http://europa.eu.int/comm/consumers/cons_safe/prod_safe/gpsd/rapex_ weekly/contact_points.pdf 13.6.6

RAPEX

RAPEX is the EU rapid alert system for all dangerous consumer products, with the exception of food, pharmaceuticals, and medical devices. It allows for the rapid exchange of information between Member States and the Commission of measures taken to prevent or restrict the marketing or use of products posing a serious risk to the health and safety of consumers. Both measures ordered by national authorities and measures taken voluntarily by producers and distributors are covered by RAPEX. In particular, producers and distributors must immediately notify a competent enforcement authority where a product is known to pose a risk to consumers that is incompatible with the general safety requirement. Such businesses must also immediately inform the competent authority of any action they have taken to prevent risks to consumers. If a competent authority considers the risk to consumers to be serious (i.e., requiring rapid intervention), it is obliged to notify the European Commission (the Commission) with “due dispatch.” The Commission will then share this information with other Member States through RAPEX for dangerous consumer products (including consumer products that are covered by sectoral Directives, but excluding food, medical devices, or pharmaceuticals). Sharing the information via RAPEX will discharge any obligation to notify other national authorities in the RAPEX area. The competent authorities are obliged to promote and encourage voluntary action, but where a competent authority has reasonable grounds for believing that a product is dangerous and the voluntary action taken by a business has not been sufficient to minimize the risk to consumers, it can order the business to take appropriate measures, including, as a last resort, recalling the product (sometimes at very short notice). 13.6.6.1 †

How Does RAPEX Work?

When a product (e.g., a toy, childcare article, or household appliance) is found to be dangerous, the competent national authority takes appropriate action to eliminate the risk. It can withdraw the product from the market, recall it from consumers, or issue warnings. The National Contact Point then informs the European Commission (Directorate-General for Health and Consumer

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Protection) about the product, the risks it poses to consumers, and the measures taken by the authority to prevent risks and accidents. The European Commission disseminates the information that it receives to the National Contact Points of all other EU countries. It publishes weekly overviews of dangerous products and the measures taken to eliminate the risks on the internet. The National Contact Points in each EU country ensure that the responsible authorities check whether the newly notified dangerous product is present on the market. If so, the authorities take measures to eliminate the risk, either by requiring that the product be withdrawn from the market, by recalling it from consumers, or by issuing warnings.

13.6.7

Liability Under the GPSD3

Failure to comply with the obligations arising under national laws implementing the GPSD can result in significant reputational damage for a business, particularly in the event of a product recall (whether instigated by the business itself or by a competent authority). Further, breaches of the GPSD can give rise to criminal liability under national laws. In England and Wales, the penalty for each offence can be a fine of up to £20,000 and/or up to 12 months imprisonment. The GPSD does not, however, require Member States to provide for the compensation of consumers who are injured by dangerous products or as a result of other breaches of the GPSD. 13.6.8

Civil Liability

On a European level, civil liability for injury caused by dangerous products is provided for by the Directive on Liability for Defective Products (85/374/EEC) (the Product Liability Directive). The Product Liability Directive provides for a strict liability regime, pursuant to which, even in the absence of fault, a supplier is liable to pay compensation for damage caused by a defective product. Under the Product Liability Directive, a product is defective if it does not “provide the safety which a person is entitled to expect.” Businesses may be subject to additional civil liability regimes at a national level, for example, in England and Wales, in negligence or for breach of contract or statutory duty. Whilst the concepts of “dangerousness” and “defectiveness” under the two Directives are different, it is likely that a product that is proven to be dangerous under the GPSD would not be considered to provide the safety that a person is entitled to expect and, as such, would also be defective under the Product Liability Directive. In such a case, the supplier of the product would be at risk of both criminal prosecution and of civil liability for damages. (It is interesting to note, however, that although a supplier may be able to invoke a complete defence under the Product Liability Directive, such as the “development risk defence,” this would not remove its potential criminal liability under the GPSD.) 3

Latham & Watkins, John D. Colahan and Mark Clarke—Lexology.

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Similarly, although failure to comply with the supporting obligations provided for by the GPSD will not incur a civil liability for damages, proof of such failure may, and in England and Wales can, be adduced as evidence of a business’s negligence or breach of statutory duty. Further, because the GPSD provides for a number of routes through which producers and distributors of consumer products can or must provide product safety information in writing to enforcement authorities and/or the Commission (both of which can require the production of reports as a compulsory measure), such businesses must be mindful, to the fullest extent possible, about the creation of adverse or sensitive documents in this context. Enforcement authorities are obliged to make such information available to the public and, where an enforcement authority considers there to be a serious risk, it must notify the Commission, which will share the information with the other Member States. The corollary is that product risk information is now disseminated more quickly and widely than ever before and the greater the availability of information about potentially dangerous or defective products, the greater the risk of civil claims. Added to which, in the event of a civil claim in England and Wales, such information as has been communicated to the enforcement authorities would probably fail to be disclosed in the civil proceedings (and this is likely to include information that has been communicated to the enforcement authorities under cover of “professional secrecy”).

13.7 EU RECALL PLANNING GUIDE Planning ahead is vital so that producers and distributors can act quickly if they need to. 13.7.1

Establish Your Policy

Producers and distributors both need corrective action policies. 13.7.2

Agree on Your Action Plan

The main components of a corrective action plan are described below. 13.7.2.1 A Corrective Action Team knowledge of the following functions: † † † † †

Design, Production, Product safety/risk management, Quality assurance, Purchasing,

A producer should assemble a team with

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Distribution, Marketing and customer service, Public and corporate relations, Legal, Accounts.

13.7.2.2 Monitoring Procedures Producers and distributors must have procedures for monitoring problems with their products. This means you need to have systems to collect and analyse the following information: † † † † †

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Reports of accidents involving your products, Complaints from customers, directly or via retailers, Warranty claims, Insurance claims or legal actions, Noncompliances reported by the company’s quality control procedures or by other organizations, Results of product testing, Information from service engineers, Reports on returned components and products, Any evidence of hazards arising from sales to unexpected user groups, Any evidence of consumer abuse or misuse of the product, Any evidence of malicious tampering with products.

13.7.2.3 A Product Traceability Plan Customers need to be able to identify products that may be unsafe and you need to be able to trace the customers who have bought them. This means that you should have the following. A Way of Identifying Affected Products †

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Ideally producers need to mark products with a serial number so that the individual products affected can be identified. Otherwise you may have to carry out corrective action on more products than you need to. For some types of products it may be enough to be able to identify a batch number. Barcodes are widely used for identifying and tracing different types of product.

A Customer Database For effective corrective action, producers and distributors should keep records of customers and their purchases. This information should include: † †

Name, address, postcode, and telephone number of the consumer, Brand, model number, and date of purchase of the products.

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The following records may provide sources for this information: †

† † † †

Sales records for business customers, identifying which products have been supplied; Records kept by retailers of products customers have bought; Guarantee or registration cards; Servicing records, as a source of customer information; Data from companies selling products via the internet or by mail order, identifying purchasers.

A Supplier Database If a safety problem has been caused by a component from a supplier, you need to be able to identify the supplier’s reference number on the components fitted to your products. 13.7.2.4 Technical Documentation To deal with problems concerning the safety of a product, producers need to have easy access to all documentation relating to the following: †

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The design of the products (including material specifications), especially those concerned with product safety; Any changes that have been made and the dates and/or the serial numbers or batch numbers of products they apply to.

13.7.2.5 Communication and Contact Lists You need to maintain a list of all the people and organizations that may need to be contacted. The contact list should include the following. Contacts in Your Company † † † † † †

Responsible senior management, Members of the corrective action team, Other key personnel, Manufacturer’s representatives and other selling agents, Warehouse, Carriers.

Contacts in Other Organizations † † † †

Professional customers, Suppliers, National trade associations, Market surveillance authorities,

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Police, Press, TV, and other relevant media.

Service Providers † † †

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Servicing companies, Testing laboratories, Other experts or consultants, including – Legal advisors, – Risk assessment consultants, – Public relations consultants, Public relations, Insurers, Call centre agencies, Waste disposal agencies.

13.7.2.6 Risk Assessment and Corrective Action Procedures Companies need a written procedure for how they would carry out a risk assessment and take corrective action on a potentially unsafe product. (see Sections 13.7.3 and 13.7.4.) 13.7.3

Assessing the Risk

If your monitoring procedures suggest one of your products may pose a risk to consumers, you need to assess the risk to determine whether corrective action is needed. This is mainly the producer’s responsibility, but distributors may be able to supply information that will help. Risk assessment needs to be carried out by a person or small team with experience of the product and the hazards involved. Appendix lll gives sources of information on risk assessment and Appendix V gives details of a risk assessment method that has been incorporated into the guidelines to the EC GPSD. Other methods may be suitable, and your choice of method may depend on your resources. Risk assessment usually has several phases, incorporating the following principles. 13.7.3.1 Identify the Hazard Analyze the information you have collected and try to answer the following questions: † †

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What is the nature of the hazard? What is the cause of the hazard (occasional product defect, product deterioration, unusual operating conditions, misuse of product, random failure, and so on)? What range of products (models) is affected? Who is affected by the hazard (user or bystander)? What factors could affect the severity and probability of injury (competence of user, age of product, method of use, and so on)?

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13.7.3.2 Estimate the Level of Risk When you have collected this information you should estimate the level of risk to help you to decide whether action is needed. Estimating the risk depends on two main factors: †

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The severity of the possible injury to a person using or otherwise coming into contact with the product; The probability of the possible injury, which is affected by the following factors: – The probability of a product being or becoming defective and the time to failure; – The frequency with which a user is exposed to the hazard; and – The probability of being injured when exposed to the hazard.

The severity and probability estimates are combined to give an overall risk estimation. To help you to evaluate the scale of the problem you also need to collect the following information: † †

How many products are on the market? How many of the products sold are likely to still be in use?

13.7.3.3 Assess the Acceptability of Risk To decide whether you need to take action you also need to assess whether or not the level of risk is acceptable to consumers. Certain types of products (such as tools or machines with sharp blades) have obvious hazards that are accepted by consumers if they consider that the manufacturer has taken appropriate safety measures. For products likely to be used by more vulnerable people (such as childcare products) consumers would not accept anything more than a very low level of risk. 13.7.3.4 Overall Risk Having evaluated all these factors you should make an overall risk assessment, which may be expressed as one of the following levels: † † †

Serious risk—requiring rapid action; Moderate risk—requiring some action; Low risk—not generally requiring action for products on the market.

13.7.4

Taking Corrective Action

Producers have the main responsibility for carrying out corrective actions, but distributors may also have a role to play—see “Who is responsible for corrective action”. Producers should ask distributors to cooperate and keep them informed throughout the corrective action. Different steps in the process below apply to different levels of corrective action.

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Sections 13.7.4.1, 13.7.4.2, 13.7.4.8, 13.7.4.9, and 13.7.4.10 apply to all actions. Sections 13.7.4.3 to 13.7.4.7 apply only if the action affects products in the hands of consumers. 13.7.4.1 Decide What Action is Needed The decision about the type of action to be taken will be mainly dependent on the level of acceptability of the risk but it may also take account of the following: † † † † †

The total number of consumers affected; The practicalities of taking action; The anticipated success of taking action; The advice of the market surveillance authorities; Media sensitivity to the hazard.

It is suggested that, if the overall level of risk is judged to be serious, corrective action is likely to involve products in the hands of consumers and the producer should take immediate action to do the following: † † † † †

Inform the market surveillance authorities; Isolate the producer’s own stocks; Ask distributors to isolate affected products; Inform suppliers of any affected components; and Set up a communications programme to contact consumers.

If the level of risk is judged to be moderate, the corrective action may be limited to products in the distribution chain, and it may be enough to withdraw these and give the authorities details of what is being done (see Section 13.7.4.2). If the level of risk is judged to be low, the corrective action may generally be limited to consideration of changes affecting products in design and production. Possible corrective actions may include the following: † † † † † † † † † †

Changing the design of products; Changing the production method; Isolating and withdrawing products from distribution; Modifying products in the distribution chain (such products need to be marked); Improving the instructions supplied with the product; Sending additional information to consumers about the correct use of products; Modifying products at consumers’ premises (such products need to be marked); Return of products by consumers for modification; Recalling products from consumers for replacement or refund; Instructions to consumers to dispose of products;

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Offering consumers a replacement or refund for recalled or discarded products to make it more likely that the action is more successful.

13.7.4.2 Inform the Market Surveillance Authorities Producers and distributors should give the authorities some preliminary information about a product risk as soon as they are aware of it. If the overall risk is judged to be serious enough you should notify the market surveillance authorities immediately unless you have ensured that the authority has already been informed by another company or authority. 13.7.4.3 Trace Products and their Owners The activities described in Section 13.7.2.3 need to be coordinated by your corrective action team, but if you are carrying out corrective actions in different countries you may need to delegate many of them to a local agent. 13.7.4.4 Set Up a Communications Programme Whether or not you have the contact details of your customers, you need to set up a communications programme to make contact with them. This should include the following elements: † † † †

A central communication centre with free telephone number (hotline), A list of audiences to be contacted, A list of media to be used, and Draft communications for different media and audiences.

13.7.4.5

The Message and Who to Contact

The Message † †

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A corrective action announcement should contain the following:

A clear heading containing words such as “Important Safety Warning”; Product identification details (name of product, batch number, serial number, barcode, color, size, and a picture or line drawing of the unsafe product); A clear description of what is wrong with the product; Details of the safety risk or potential safety risk; Clear instructions on what to do; A website address or hot line for further information; and If appropriate, apologies for any inconvenience.

Who to Contact? † † † †

The following audiences need to be contacted:

Consumers (see Section 13.7.4.7); Internal staff members; Key business customers, distributors, and suppliers; The market surveillance authorities (see Section 13.7.4.2).

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Although there needs to be some priority in informing different audiences, they all need to receive the same message within a short time frame, especially if the risk is serious. 13.7.4.6 How to Communicate the Message Ideally you need to try to contact consumers directly. If that is not possible, choose the most appropriate communication channel depending on the following: †

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Which types of media best serve the geographical spread of affected consumers? What is the most effective and timely way to inform consumers?

Possible Communication Channels choose from the following media: † † † † † †

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Communication consultants can help you

Newspaper advertisements; Consumer telephone services (hot line, information line, and free lines); Point-of-sale information (leaflets and miniposters); TV/radio news and consumer programmes; TV/Radio advertising; Press service (website, media room, and dedicated media telephone line(s) directed at the news editors of daily national and regional newspapers); Websites (sometimes called “Dark Sites” that have been prepared and can be activated when you need them).

Recall advertisements in the press should be placed in the most suitable newspapers in each country to reach your target audience. 13.7.4.7 Deal with your Consumers Personal contact with consumers is generally the best way to ensure your corrective action is effective. If you have customers’ contact details you should send a personal letter or email or make a phone call giving the information in the corrective action announcement. However, you need to recognize that some consumers will have changed address or passed the product on to someone else. 13.7.4.8 Communicate with Other People You should pass the same information to all your staff, and consider informing the general public as quickly as possible. 13.7.4.9 Carry out the Corrective Action You need to carry out the corrective actions decided in Section 13.7.4.1, in each of the countries involved and for all

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products affected, as quickly and efficiently as possible. Products need to be dealt with in the following ways: Collect Products do the following: † †

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If products are to be returned to the producer, you will need to

Arrange to collect them from distributors; Ask consumers to take the product to their nearest distributor or retailer if they are portable; or Arrange for them to be collected from the consumer if they are not portable.

Unsafe products should be clearly identified and the stock movements properly recorded. The distributor should check the identity of the product and compensate the consumer with a replacement or a refund. Correct the Products If you have offered to repair or rectify the consumer’s product you may do the following: † †

Have this carried out by an agent or dealer at their premises; or Send an engineer to the consumer’s home to carry out the modification.

Modified products should be clearly marked. You need to decide what to do with products that have been recalled. It may be acceptable to do the following: †

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Carry out work that will bring the product up to an acceptable standard for resale products that have been rectified need to be clearly marked and the documents accompanying them may need to be updated; Rework some of the materials or components to enable them to be reused in other products.

It is not acceptable to sell or pass on uncorrected products to consumers. If they cannot be corrected or reworked you will need to ensure that the products are disposed of safely. 13.7.4.10 Monitor Progress Before your corrective action starts you will find it helpful to set a target for the level of response in each country. Authorities in individual countries may be able to give you information about the likely level of response. You may set different targets for the response from distributors and the response from consumers. When your corrective action has started, you need to monitor the level of response for a period of weeks and further action may be needed if the target is not reached. If you reach the target, the corrective action can be formally ended, but you still need to be able to deal with products that are returned to you at a later date.

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13.7.5

SOME FINAL THOUGHTS ON RECALL PREVENTION

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Learning from the Experience

After the corrective action is over you need to look at what caused the problem initially with a view to trying to stop it happening again. Finally, you should assess the success of your corrective action procedure and try to improve it for the future. 13.7.5.1 How Can We Stop it from Happening Again? review is likely to focus on a review of the following: † †

This part of the

The standards and design principles that you use, and The effectiveness of your quality assurance and product safety/risk assessment systems.

The parts of the system that failed to prevent the problem need to be studied and improvements considered. 13.7.5.2 How Can we Improve our Corrective Action Procedure? The operation of each part of the corrective action procedure should be reviewed to determine whether it could be improved. For example you should carry out the following: †

†

†

Monitor the effectiveness of the communication methods used (possibly by carrying out opinion research) and adapt your policy where necessary; Evaluate your internal procedures for corrective action and assess the need for changes in policy or training; Compile a full report of all actions taken and issues solved during the period of the action.

13.8 SOME FINAL THOUGHTS ON RECALL PREVENTION4 In light of the large numbers of product recalls every year, many companies are wondering what steps they can take to help ensure that their products are safe and limit the potential of a future recall. All recalls re-enforce the need for manufacturers, importers, distributors, and marketers to pay special attention to each stage of a product’s lifecycle, as discussed below, no matter what the product’s origin. 1. Start with a robust design that addresses potential hazards. It is a given that a product will be designed to meet applicable mandatory industry standards. However, it is also important to attempt to design around potential hazards that are not subject to standards. 4

Portions were taken from Arnold & Porter LLP & Lexology.

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2. Proper instructions and warnings do not happen by accident. Lack of adequate warnings and instructions is a leading cause of product liability lawsuits. It can take considerable time and effort to develop proper instructions and warnings. Therefore, allow time in the product development process to craft instructions and warnings, and consider reassessing them after a product is on the market based on feedback concerning how the product is used in practice. 3. Choose suppliers with care: price is only one part of the picture. In some cases a company may benefit by reducing the number of suppliers with whom it does business to a core of key suppliers to help ensure proper training and monitoring, as necessary. In addition, it is important to closely monitor the practices of the selected suppliers, to ensure they in turn are not farming work out to additional subcontractors. 4. Adopt and follow manufacturing and change control procedures as well as procedures for production testing: problems often arise when in-house departments or suppliers substitute parts or components without proper approvals, documentation, or testing, and ultimately leads to a properly designed product no longer being manufactured according to specifications. Similarly, problems arise when internal departments and/or a subcontract manufacturer run out of specified materials during production and substitute materials they believe are equivalent, which proves to be an error in judgment. Proper change controls and production testing must be adhered to at all times. 5. Collect, monitor, and assess postmarket data from available sources: incident reports—whether received from a company’s own customers, suppliers who have sold the same materials/components to other companies, recalls initiated by other companies of “like” products, as well as other sources of safety information—should be reviewed on an ongoing basis to identify potential problems. 6. Understand who bears the risk of a recall or product liability claims. Keep your indemnification provisions in contracts, agreements, and terms and conditions current and relative to new developments. Plaintiffs, as well as agencies like the CPSC, may seek to hold many parties responsible in the chain of distribution. 7. Understand your insurance policy and provisions as it relates to subcontract issues, imports, liability coverage, recalls, and even punitive damage awards. Companies should carefully consider the level of risk for which they can afford to be self-insured. 8. Consider conducting a product liability prevention assessment. A self-assessment can help ensure that a company’s policies and practices are adequate and being followed. Although not all problems can be avoided and there is no “one size fits all” approach to product safety, keeping the above points in mind can help reduce risks to consumers, a company’s reputation, and the bottom line.

14 The Quality System: Incorporating Safeguards into the Procedures The Quality Assurance operating system is a valuable tool for any manufacturing corporation, and can be a real asset in a product liability case. Unfortunately, it can also become a major liability, which I will explain. From a positive perspective, a manufacturer could not hope to have all the elements under control on a consistent basis that could have a bearing on the quality of the products and services they provide, without documented procedures and processes for all the employees to reference and follow. Believing such things are engrained in the employees, or commonly understood by all, and therefore procedures are not necessary, is fools play. There must be documented procedures in place, they must be kept current and available for all the employees, and they must be periodically audited to assure they are being followed or updated as required. It should be noted that I have spent most of my professional life in Quality, progressing from a Quality Engineer in the 1970s, to a Quality Manager, to the Quality Director, and ultimately to being VP of Quality and several other corporate areas. I have spent around 30 years in the Quality profession and have been there as the whole profession went through numerous evolutionary changes, and was a Director of Quality developing a quality system for my second large multiplant corporation during the 1980s as American industry fought over which Quality guru had the best program. It was almost like following some religious sect. Large potential customers would come and audit your company as a new supplier, and their management team would have just been indoctrinated into one of the Quality gurus’ religions, and if you were not a believer of that same

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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faith, then your company had it all wrong. I was personally quite happy to see the advent of the ISO standard in the late 1980s that really began to take shape in the early 1990s, which finally eliminated the Quality guru stigma of the 1980s. Unfortunately, ISO had a few of its own problems as executives from many corporations pursued the banner of certification, which inevitably in too many situations then led to the disbandment of the department, the entire program, and effort in the years that followed. Many of the executives that attained those meritorious and highly promoted certifications then searched for the next major accomplishment or corporate buzzword. Achieving some award is not what Quality is all about, which is why I never took a second look at the Malcomb Baldridge award. In my opinion it is nothing more than another corporate trophy for some CEO to show off. One of the things executive management learned from the ISO standard was that quality really is everyone’s job, not just the responsibility of the Quality department. This was not something new to the Quality profession, because Quality professionals always knew quality was everyone’s job; however, the rest of executive management never really got that message until they pursued ISO certification. They looked at quality as the responsibility of the Quality department. As part of the ISO program system audit teams would be put together and everyone was involved in initially securing the ISO certification as well as maintaining it afterward. But now that everyone within management was actively involved in driving and maintaining the program, as they should have been all along, management began to feel there was less need for Quality Assurance departments and the departments began to be eliminated. After the new millennium it seemed that Quality programs like ISO 9000 began to slowly lose their popularity, and even the Quality profession started to take a back seat to new corporate focuses such as 6 Sigma and especially Lean manufacturing, not really Quality programs, but efforts to improve profitability. Companies began dropping their certifications, largely due to cost and time consumption, bringing in new consultants to spearhead these new corporate focuses. With the new profit improvement schemes and cycle time reduction focuses, corporations saw even less need to focus on quality. After all, it was now everyone’s job to assure quality and many executives felt that element was totally under control now, so they began to eliminate the Quality positions and turn their focus on these new buzzwords. Even American Society for Quality (ASQ) began to experience major drops in memberships. The problem this will ultimately create is that, although many corporations did achieve their highest levels of quality in the 1990s, by dropping such programs and efforts and shifting the corporate focus to these other areas it will eventually lead to the digression of quality products, increase manufacturing defects, which could then lead to an increase in recalls and product liability, and eventually the reinvention of Quality at a later date. Quality programs are a necessity and they require their own focused management. Programs like Lean and 6 Sigma should always have been in place, running parallel with Quality or even as an enhancement to the Quality program; however, they should

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not be instituted in place of Quality. Corporate executives can really understand cycle time and cost reductions, and improvements in profitability, but the lack of cycle time reductions will not generate lawsuits. The lack of quality will. My intent in this book and chapter is not to explain how to build a Quality system, there are countless books already on the market that will teach that. My focus here is to talk about the formal concept in general, identify specific concerns, and how everything we are talking about needs to be incorporated into the Quality program, or I do not believe a manufacturing corporation will be successful in this PS&LP effort.

14.1 THE LEGAL FOCUS ON QUALITY In a product liability case the attorneys for the plaintiff will look for every opportunity they can find to prove the defendant (manufacturer) was negligent in their actions; that is, negligent in the development of the product, negligent in the marketing of the product, negligent in warnings and instructions, and negligent for not being “state of the art” in numerous areas, including Quality. They know a state-of-theart manufacturer would have a comprehensive quality program in place in order to ensure the products they made, and the processes they followed in order to develop and manufacture the product, would be consistent in nature and in compliance with the standards and specifications. Not having a state-of-the-art quality system in place would give the plaintiff’s attorney more ammunition in pursuing their case against the manufacturer, especially in a manufacturing defects case. Quality programs serve as an added assurance not only to the manufacturer, but also to the customer, that the product being made and supplied will be manufactured in compliance with established specifications and will help to ensure a higher level of quality and product reliability. Any large Original Equipment Manufacturer (OEM) or commercial customer who might order a large quantity of a given product or component from a specific manufacturer wants to be assured that they can have every confidence that the products they receive will be in compliance with the specifications and will be of high quality and prove reliable for the intended application. This is not to imply that any one program is better than the rest, and surely not to imply that any one program is considered state of the art over the others, but if there is one thing attorneys have learned it is that a state-of-the-art manufacturer would have a comprehensive Quality program in place, or the manufacturer would not be considered state of the art.

14.2 HOW QUALITY CAN BECOME A LIABILITY When a manufacturer gets involved in a product liability case, and the focus shifts toward the manufacturer’s ability to consistently control the quality of the products being manufactured, especially involving a case where it is alleged that the product in question may have been supplied in a defective condition as

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opposed to having been altered in the field, the manufacturer needs to be able to show that they indeed have a fully comprehensive quality system in place that is consistently being followed and would prevent such products from ever being made or at least from leaving the plant. Without the ability to present such a program and effort the manufacturer would be wide open to such allegations and possibilities. However, as part of any certified or comprehensive program the manufacturer must audit the system regularly to ensure that employees are complying with the program. The audit is a documented process that generates records not only for the company to react to and for the company’s own historic reference, but documents that will be provided or even created by outside auditors and certification companies, such as ISO registrars. We need to perform such audits not only to ensure the procedures and processes are being routinely followed, but to identify problem areas and determine what corrective actions need to be put in place in order to prevent future noncompliance. In a product liability case, especially one that deals with products entering the marketplace with alleged manufacturing defects, these records of noncompliance can now become a liability to the manufacturer, or possibly a dangerous document. How can you be trying to convince the court that you are a state-of-the-art manufacturer, with certified procedures and processes in place that would prevent defective products from being produced or placed on the market, when your own audit records prove that you do not even follow your own procedures? This is somewhat of a Catch 22. You have to have comprehensive quality programs in place, you have to audit the quality programs to ensure they are being followed, and in all likelihood, every manufacturer will uncover certain procedures or processes that are not being routinely or thoroughly followed. So how can you prevent that from becoming a potential liability down the road? To an absolute degree you cannot prevent the possibility of procedures not being followed, but through strict enforcement and the unwavering support of top management you can at least minimize the possibility and act on it quickly. Incidents of noncompliance will likely happen, but by catching them quickly and instantly isolating materials that may have been affected, a manufacturer can still demonstrate a high level of control over their programs and the products entering the marketplace.

14.3 THE PLP PROBLEM WITH QUALITY PROGRAMS In general, quality procedures identify how the overall Quality Management System works within the company, covering each area of Quality management, product development, manufacture, and service. The focus is to describe the management processes and ultimately ensure that the products are going to be made per specification and continuously improve in their level of quality. The PLP question now becomes “So who said the spec was right to begin with?” The quality program, and even the Quality department, are largely focused on

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ensuring the products follow the agreed development procedures and are being built in compliance to some specific set of specifications, and monitoring the amount of products that are within specification as well as the percentages of those that are not, but always trying to control variation. But how did the manufacturer come up with this set of specifications? Was it nothing more than one design engineer’s best shot at how to build the product? In numerous situations this is truly the case, or in more complex product designs more than one engineer determined the specifications for different parts of the product, but in many circumstances the specifications were not arrived at through any group consensus or analysis, but purely through the infinite wisdom of a single engineer, and if the engineer was wrong, so goes the product. Furthermore, many Quality programs, and standards for the development of Quality programs, never enter into the mechanics and elements of PLP or achieve that degree of focus. It is assumed that such elements are automatically incorporated into any formal Quality program. In essence, if we are doing everything we can to ensure a quality product and service, then we must be doing everything possible to address product safety and liability prevention, but that is not really the case. In the first place, if Quality management, or the executive team in general, does not know what they need to focus on, then how would such elements automatically be part of any Quality program? Programs like ISO will require that key areas of a quality program are being addressed, and then require proof that they are being implemented and followed, but the standard is not going to tell you what you need to be doing; you basically tell the standard how it works within your company. A few examples—any Quality program will require that there be something in place for supplier selection and control, but will the program models or requirements recommend that the companies ensure their suppliers carry product liability insurance? The standards for such programs will require that the manufacturer identify the product development process, but will it state how best to create a product safety team, or what considerations to address when performing a hazards analysis/risk assessment, or point out the standards for warning labels and instructions, or things to look for in order to address potential exposures to liability in product promotions and marketing, what clauses need to be incorporated into contracts and purchase orders, or how not to write documents, or address a large number of other concerns that could help protect the company from being sued out of existence? Quality programs do not get into any of this, basically nothing does, so how is the company supposed to get such controls in place? The Quality department and management teams need to understand all of these key focus areas and then incorporate each of the added items into their existing Quality procedures to ensure they are continuously being followed from that point forward. But an effective product liability prevention effort will never be successful if the manufacturer does not first have a sound comprehensive Quality program in place. You cannot add to something that is not there in the first place. The product liability prevention effort is meant to be an addition to the established Quality program, taking

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the existing comprehensive program to the next step, or next dimension. It cannot take the place of a nonexistent Quality program, nor can it be developed from scratch or be a self-standing program. It only works if it is adding steps to procedures that are already in place and being followed.

14.4 EVALUATING THE QUALITY PROGRAM One of the problems commonly found in the manufacturing world is that almost every manufacturer feels that they have an adequate or good Quality program in place, even if in fact they are light years away. The manufacturer hopefully has a Quality head, and if required may be able to present a Quality Manual, but the question then becomes how current the procedures really are. There is nothing worse then to be handed a Quality Manual booklet that was professionally printed by a printer. Procedures and processes need to be in such a format as to allow quick and easy updates and revisions, obviously something that a professionally printed manual would never allow. Of course, if there is no head of Quality (by formal title), that begins to imply there is less chance that there is really anything in place. Some companies are moving to paperless facilities, where everything is contained on the computer. This can be fine, provided it can be proven the system is working, being followed, and is kept current. In a manufacturing plant it becomes harder to imagine that employees and operators could be following established processes, if there is nothing posted right at their workstation. If they have to spend time signing on to the system to look something up, it would not seem likely that they would actually do it. The worst-case scenario would be that there is no one with a Quality title (anymore), there are no Quality Procedure Manuals, or if they do exist nothing has been revised in years, and there are no documented audits of the system. That would pretty much prove there is no formal Quality program in place at the company nor any assured controls. Comprehensive Quality programs are usually the outcome of one of two driving forces. Either the CEO recognizes the need for its initiation, possibly due to financial losses, severe customer dissatisfaction, or just the recognition of situations being out of control, or the program and effort were demanded by an outside force—major customers requiring it, the requirement of having to be certified, or some other governing force requiring it to be in place. Naturally, it is best if the CEO of the company drives the initiation of the program and is fully convinced of its need and benefits. In this situation the company is always likely to stay committed, and the CEO will always be there to ensure direction and support when situations become challenging. Unfortunately this is not always the case and quite commonly the requirement for a comprehensive Quality program is brought on by an outside (customer) force, which is not as impressive as having the company take on the initiative themselves, but many times just as effective. Being required to initiate such a program is not always a bad thing, because the organization normally is not left any option but to

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do it, and in many such situations the outside force continues to monitor the program and effort, and demands continuous improvement, at least in the production of their products. So even though the program may not have been the company’s own brainchild, after it is launched it normally follows a route of continuous improvement and becomes ingrained within the organization.

14.5 INCORPORATING PSLP INTO THE QUALITY PROGRAM Assuming there already is a comprehensive Quality program in place, the challenge now becomes how to incorporate all of these new items into the existing program. In a number of the chapters I have already included some of the procedures that pertained to the topics, such as contract, design reviews, and recalls; here I will show an example of an existing procedure with the PS&LP element added. As mentioned, one of the many key procedures is that of supplier control. Suppliers can get the OEM into as much trouble as the OEM could get itself into if they do not adequately focus on design reviews and hazards analysis. Typically, today’s manufacturer will have procedures in place explaining their steps for selecting and controlling suppliers, so the effort here would be to merely add this new step of ensuring the new suppliers carry product liability insurance. This will also require that someone within your company would need to start maintaining a file of the suppliers and insurance certificates (in this example finance), which would need to be maintained and updated each year, otherwise the supplier could drop their insurance after the first year and your company would be totally unaware of it. Then, when a major product liability incident happens 2 – 3 years after the Chinese company is brought in and your company pursues having that supplier and their insurance company notified of the event, you might find out that they dropped their insurance the previous year and had nothing currently. Box 14.1 is a simple procedure with the PS&LP inclusion. It should also be mentioned that there are major international insurance companies, such as AIG and Chubb, that will insure even Third World suppliers, such as suppliers from China. The OEM can even take out insurance with the same insurance companies, covering them against problems incurred by products they purchased from Third World suppliers. By ensuring that your Chinese supplier has product liability insurance with such international carriers will be a significant improvement over having the manufacturers insured through a Chinese insurance company, or worse yet, having no insurance, which is typically the current situation. Remember, if your Third World supplier were to furnish a product or component that ended up causing personal injury in the United States and your company was sued, even with a good contractual agreement with the supplier your company would have little chance of forcing the Chinese manufacturer to indemnify you. You would end up having to take them to court in China, which would be a problem. So the best course of action is to require that they maintain product liability insurance with a notable international insurance company, and include you in the policy.

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BOX 14.1 SAMPLE PROCEDURE FOR THE SELECTION AND QUALIFICATION OF SUPPLIERS

14.9

TRAINING

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14.6 PRODUCT SAFETY AND QUALITY GUIDELINES BY THE CPSC The CPSC has published a Handbook for Manufacturing Safer Consumer Products, which is available through their website at http://www.cpsc.gov and offers good guidelines as to what they think should be incorporated into the corporate program as well. As part of the effort to incorporate PSLP into the corporate Quality System, it is beneficial to review the elements being discussed in the CPSC handbook, even if you are not a consumer products manufacturer. The following is just part of what is presented in their handbook. Manufacturers must assure the safety of consumer products. This is achieved through the design, production, and distribution of the products they manufacture. It is best accomplished by a comprehensive systems approach to product safety, which includes every step from the creation of a product design to the ultimate use of the product by the consumer. The basic concepts for a comprehensive systems approach for the design, production, and distribution of consumer products are discussed in this Handbook. 14.7 PRODUCT SAFETY POLICY The commitment of the manufacturer, retailer, importer, or buyer is the first executive step to be taken in developing an industrial consumer product safety system. A clear, strong statement from senior management citing statutory and voluntary reasons for this commitment is needed. The policy should be explicit with respect to the primacy of product safety during design, production, and distribution. This policy should also make clear that it applies not only to the internal operations but also to suppliers, including suppliers of products manufactured outside the United States. Ordinarily such a statement is publicized widely within the organization as a platform for subsequent planning and action. It may also be widely publicized outside the organization. 14.8 ORGANIZATION The organization and management arrangements by which safety requirements are executed are the prerogative of the manufacturer. Except in industrial activities of very limited size, responsibility, and authority for implementing particular elements in this Handbook, and for meeting the requirements of standards, should be clearly assigned to specific persons at the executive level and to specific operating entities, such as the responsibility and authority for product recalls. Although management determines organizational patterns, it is also management’s responsibility to formalize its organizational decisions in writing and to make this information available to interested persons. 14.9 TRAINING Training, to a degree commensurate with the complexity and sensitivity of work assignments, is an integral element of effective safety systems. This training may

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be formalized (e.g., scheduled classroom meetings or on-the-job training) and it may also be accomplished by publications, bulletins, posters, or other media. Most personnel have need of information regarding regulatory safety requirements related to the products they help fabricate, distribute, or service, including information regarding the influence of their work on product safety. Safety training should be conducted at an appropriate level for the target audience. For example, training for senior executives should provide an overview of a company’s responsibility for product safety as well as the benefits. It should include management tools needed to implement a product safety process and instill a safety culture within the company. Training for persons responsible for making decisions to purchase products for a retailer (buyers) should include basic product safety requirements for their product area. They should be trained to be able to identify potential hazards and minimum test/certification requirements for the products they purchase. Finally, product designers and engineers should have intensive and frequent training on known hazards, foreseeable use analysis, evaluation methods, safety standards, test methods, and use of injury databases. Active participation in relevant voluntary standards development activities is an effective way to maintain knowledge of current safety issues. Certificates (or similar forms of recognition) are advisable when training programs are successfully completed for highly specialized skills. Generally, product safety training should be viewed and implemented as an ongoing integral element and not as an add on or occasional event.

14.10 14.10.1

TECHNICAL GUIDANCE Design Review

The design review is an examination of materials, configuration, packaging, and labeling for purposes of identifying potential product hazards. The design review consists of the following: 1. Foreseeable Use Analysis. A foreseeable use analysis considers the potential ways in which a consumer will interact with and/or operate a product. It is a critical step in designing a safe consumer product. Foreseeable use includes the use as intended by the manufacturer, and also use in ways that were not intended but can reasonably be expected to occur. The effectiveness of a safe product design may be evaluated in various ways. For example, a proposed design may be measured against accepted product standards such as a set of industrial voluntary standards and/or regulatory standards. Additionally, it may be measured against a set of objectives for the product and even comparable products. The product evaluator must define product use environments and contexts as precisely as possible, as well as the kinds of people who will operate and/or interact with the product. The

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evaluator should define the age levels, physical and cognitive limitations of users, and contingencies that might occur, including uses not intended by the manufacturer. For example, one can predict that a snow blower may possibly be used by tired adults in demanding physical conditions of extreme cold, wet, and poor visibility. Significantly, the consumer will likely have no training and only occasional experience. Any warning labels may be obstructed by snow, and instructions will likely not be with the machine. The user will probably be wearing heavy outdoor clothing and heavy gloves, which will make control manipulation difficult. Factors such as these should be taken into account when evaluating the safety of the product design. An effective foreseeable use analysis will distinguish substantial safety hazards that involve risks of injury or impairment of health from product deficiencies. Systematic analysis tools, such as a Failure Modes and Effects Analysis (FMEA) or fault tree analysis are used by product designers to identify potential safety hazards. The FMEA is an approach that identifies the components of a design or the functions of a process and the potential consequences of a failure. Conversely, the fault tree analysis begins with the consequences and determines the sequence of events that led to them. A thorough review of injury data and existing safety studies is also an important step in the design review process. 2. Team Review. Results of these evaluations should be reviewed by a group of individuals that is chaired by a designated senior official. This group should include personnel responsible for quality assurance, consumer services, and compliance with standards and regulations. Manufacturers as well as buyers that do not have in-house expertise should consider using an accredited test laboratory to evaluate the safety of a product. Appropriate corrective action must be taken when product safety hazards are identified. Adequate records must be maintained showing the details of the hazard and subsequent corrective actions taken.

14.10.2

Documentation and Change Control

Changes in design, production, and distribution must be subject to control, be made matters of record, and be incorporated into all documentation affecting the product. Supporting technical documentation (e.g., drawings, replacement parts data, production, inspection, testing and repair instructions, and operating handbooks) must be current with the design. Obsolete documents and data are to be removed from all places where they might be used inadvertently.

14.10.3

Purchase Product Control

Unless raw materials, parts, and subassemblies are safe and reliable, it is unlikely that the end product into which they are assembled will be satisfactory. Product

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manufacturers must exercise control over suppliers to a degree consistent with the potential safety impact of the items they supply. This control encompasses the following actions: 1. Preparation of purchase documents with clear and precise statements of design and safety requirements, including, as applicable, the provisions of this Handbook and review of applicable statutes, regulations, and consensus (voluntary) standards to make sure the materials to be used are in compliance with them (e.g., documentation and change control); 2. The selection of suppliers with proven ability to provide acceptable and safe products; 3. The examination of suppliers’ facilities, operations, records, and supplies to the extent necessary to verify conformance of supplies to contractual requirements; 4. Taking corrective action promptly when circumstances necessitate such action; 5. Effecting unequivocal understanding regarding the responsibilities of suppliers for reporting substantial consumer product hazards to the manufacturer and/or the U.S. CPSC, in accordance with Section 15 of Public Law 92– 573, 15 U.S.C. § 2064. 14.10.4

Production

Although all production practices affect product safety, the following necessitate particular attention: 1. Materials. Raw, semifinished, or finished materials must conform to configurations and conditions specified during product design. This requirement is accomplished for suppliers’ material by actions described in “Purchase Product Control” (Paragraph C, Section III, above). For those materials modified or degraded by handling, storage, and/or processing during production, periodic verification is necessary to assure that prescribed materials are being used. It is necessary that materials be identified and labeled by means of shop travelers, tags, stamps, or other devices, to prevent mistaken utilization. 2. Work Instructions. Work operations affecting safety are to be described in writing, including inspection and testing procedures, except those that are so simple that guidance is unnecessary. These work instructions may exist in many forms, including work orders, operation sheets, inspection logs, repair logs, test procedures, and process specifications. They may also specify (a) equipment to be used for particular operations, (b) traceability arrangements identifying the person(s) who performed each of the operations, and (c) forms for recording quantitative data such as test readings and dates accomplished. 3. Facilities. Different products, designs, and fabrication processes necessitate varied levels of precision and accuracy of manufacturing equipment

14.10

4.

5.

6.

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and tooling. The precision and accuracy of equipment and tooling must be commensurate with product requirements, that is, equipment capable of consistently fabricating products to established tolerances. Production Processes. Production processes need to be controlled to minimize variability in product performance and characteristics. To minimize the probability that these operations are resulting in hazardous defects, it is necessary to institute controls of equipment, methods, and qualifications of personnel. Such controls consist of scheduled inspections of equipment, surveillance of compliance with procedures, and verification of competence of personnel. Records of the results of such inspection and surveillance are necessary to substantiate the state of control of these processes. Repair. When a manufactured product is determined to be potentially hazardous, it may be discarded or repaired. In the event that the product is repaired, repair operations must be monitored to the same degree or more intensively than original production operations. For example, when it is determined that a component is unsafe, adequate precautions, including testing as required, must be taken to assure that the replacement component is effective in eliminating the safety hazard identified. Repair may require more skilled operators, more precise equipment, and more closely controlled materials. Repair operations performed by distributors or other representatives of the manufacturer must be subject to the same controls as would apply to products repaired in the production facility. As with original production, repair practices are to be described in work instructions. Work Environment. The fabrication of safe and reliable products is a function of many factors, including physical working conditions. A satisfactory working and processing environment (e.g., good lighting and controlled temperature and humidity) are necessary prerequisites for the manufacture of safe products. Handling and Storage. Raw and manufactured materials used in production are to be handled, packaged, and stored under conditions that preclude damage and resultant safety hazards. For example, items such as special adhesives that have a limited shelf life and require prescribed storage conditions must be identified in terms of their shelflife limitations and should be monitored by periodic inspections to assure their continued effectiveness and safety. Precautions for handling, packaging, and storage are normally prescribed in work instructions.

14.10.5

Quality

Quality assurance refers to a systematic process taken throughout manufacturing to prevent and detect product deficiencies and product safety hazards. Accepted quality management processes and systems such as those included in the ISO 9000 standard can be implemented by manufacturers of all sizes. A quality assurance system is specific to a manufacturer’s operations and addresses product safety

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matters. The following elements of a quality system are selected for special emphasis due to their significant effect on product integrity and safety: 1. Inspection and Testing. It is imperative that consumer products be inspected and tested prior to distribution in order to verify their conformance to established requirements. When a product includes components or subassemblies that are not accessible for inspection and testing, good judgment dictates that inspection and testing be undertaken, as applicable, before such items are inaccessibly assembled into parent units. It is the manufacturer’s responsibility to provide guidance for inspection and testing to the degree that operators are fully informed on how to conduct inspections and tests that are meaningful, objective, and uniform, and on how to record and maintain results. 2. Statistical Methods. Except for critical characteristics or when pertinent standards require the inspection and testing of each unit of product, manufacturers may use statistical techniques for inspection, testing, calibration, process control, and technical auditing. Sampling procedures should be in accordance with standard sampling tables, including related procedural precautions. If the manufacturer designs alternative sampling plans, documentation of the statistical characteristics and procedural details of such plans is needed. 3. Nonconforming Material. In most manufacturing operations some material, for one reason or another, fails to conform to established requirements. Such nonconforming material is a potential hazard to safety because it can be easily and inadvertently assembled into end products. Therefore, it is necessary that nonconforming material be clearly labeled and segregated.

14.10.6

Measurement and Calibration

If not properly selected, calibrated, and maintained, equipment and devices for measuring, inspecting, and testing could generate misleading information. The selection of inspection and testing equipment with a sufficient degree of precision and accuracy, and their adequate calibration and maintenance, are central to the assurance of product integrity. Good calibration practice necessitates the use of verifiable or traceable measurement standards (e.g., standards traceable to the National Institute of Standards and Technology). 14.10.7

Distribution

Distribution practises significantly influence the safety of consumer products. Accordingly, control over final packaging and shipping operations is necessary. This control includes the selection of adequate packaging materials, design of methods of packaging that preclude damage in shipment, and selection of shipping methods consistent with the physical properties of the product. Packaging and shipping techniques and practices are, of necessity, revised as experience dictates. In those instances where distributors or other organizations are involved in assembly

14.10

TECHNICAL GUIDANCE

313

or test operations prior to delivery to the consumer market, they must be provided with current and adequate assembly and test instructions. It is incumbent on the manufacturer to assure that these instructions are fully implemented, under direct management control. 14.10.8

Consumer Service

Consumer service programs are of varied scope and magnitude, depending on manufacturers’ policies and objectives. To assure product safety, these programs necessarily include four elements: (1) advising consumers through manuals or otherwise how products are to be assembled and operated to prevent safety hazards; (2) proactively informing consumers how and where to obtain product servicing, particularly for deficiencies or malfunctions that are potential causes of product safety hazards; (3) the establishment and maintenance of a records system that identifies products (e.g., serial number, model, and date of manufacture) and identifies their location in the distribution system, including consumers; and (4) clear written procedures for company response to product defects that pose the risk of consumer injury, including clear recall procedures and policies. 14.10.9

Records

An effective product safety system requires records in sufficient detail and format to permit timely detection of safety hazards and trends, and for effecting traceability of the assembly operations and components involved. For these purposes the following records are particularly necessary: (1) the results of inspections, tests, and calibrations; (2) consumer complaints and comments and related actions; (3) actions taken to correct product and system deficiencies; (4) location of products within the production and distribution systems so that prompt and effective recall can be accomplished, if required; and (5) information required by regulations issued by the CPSC that appear in 16 Code of Federal Regulations Parts 1101 through 1702. 14.10.10

Corrective Action

To prevent potentially dangerous products from being delivered to consumers, it is necessary that manufacturers establish procedures to take prompt corrective action when appropriate. This action includes determination of hazard cause(s), prevention of their repetition, and removal of hazardous consumer products from production and distribution channels. Reporting procedures are necessary to keep executive management informed of product safety hazards and trends that might induce such hazards. Most importantly, arrangements must be provided for compliance with CPSC safety standards, and Section 15(b) of the CPSA, which states, “Every manufacturer of a consumer product distributed in commerce, and every distributor and retailer of such product” shall report to the CPSC products that contain “a defect which could create a substantial product hazard.” If the product is certified by an accredited laboratory, the manufacturer should also notify the laboratory.

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THE QUALITY SYSTEM: INCORPORATING SAFEGUARDS INTO THE PROCEDURES

14.10.11

Audits

Audits are planned, scheduled, and management-directed examinations of procedures and operations to determine whether they comply with (1) applicable CPSC laws and regulations, (2) relevant safety standards, (3) established company policies and directives, and (4) principles of this Handbook. Audits of particular functions and activities should be performed by persons other than those administratively responsible for such functions. Results should be recorded and distributed appropriately within the organization for the accomplishment of necessary improvements. Note: Implementation of the principles in this Handbook is the responsibility of executive management, and must include all levels of management and all employees. This responsibility is most effectively accomplished by an integrated program that implements all provisions of the Handbook that are applicable to particular consumer products.

15 Claims and Investigating Incidents When a company becomes aware of an accident or injury involving their product, the in-house product liability expert needs to immediately begin an investigation. After all, having a product allegedly injure a person, start a fire, or create property damage in some other manner, is truly the ultimate quality failure of a product. Therefore if the product has such a capability, management should definitely want to know about it and react accordingly. Does the allegation appear credible? Does the company need to immediately place a hold on the product and stop production and shipping? Does the company need to reinspect, retest, or redesign the product? Does the company need to possibly recall the product? These are the kinds of questions a company needs to address, once it has investigated an incident and the specific product in question. But first the company needs to get into the habit of investigating such incidents. It is common for companies to pass such incidents or claims on to their insurance company and let them handle the claims for them, but that is not the best practice. Companies need to take charge of such investigations in order to recognize what is happening and come to some conclusion as quickly and effectively as possible. Having such assistance is appreciated by the insurance companies, as they would otherwise be faced with sending their own people to locations cold, and obviously they would not understand the product or what they would be looking at, having no recourse but to look and listen to what is being presented to them from the other party. The initial visits and inspections are the most critical, because in most cases little has been altered, reviewed, or stories polished, and the company’s investigator will be Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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able to glean from the visit the first set of facts and pictures surrounding the incident, which are otherwise subject to change as time goes on. Most importantly, if the company’s expert can inspect the product and scene and determine that the product really was not responsible for the incident, and convince the other parties involved, the expert can be very effective in stopping the action from proceeding any further. I had met with numerous insurance companies and their experts, attorneys with college professors, and countless others that felt they had the whole situation figured out and wrapped up, and convinced them otherwise. I never kept track of the statistics, but I would say that in 75% of the cases I convinced the other parties that what they originally thought happened, could not have happened. The greatest chance of achieving this arises in the very early stages of the incident, before the other parties invest more time and money to try to prove their point.

15.1 HOW THE COMPANY LEARNS ABOUT PROBLEMS Field problems can be brought to the attention of the company in many different ways. First there could be an official court case being brought against the company, and in essence the company is notified that it is being sued, which should immediately be investigated; short of that there are many other ways the company can first become aware of a potential product liability claim before it actually becomes a lawsuit. In some situations someone in the field, a customer representative, a sales representative, dealer, distributor, or an eyewitness could call the company or an account manager or salesman and tell them about a situation that just happened. It is common for another insurance company to contact the manufacturer and make them aware of an incident involving one of another insurance company’s clients, and want to know who insures the manufacturer so they can initiate a claim with the manufacturer’s insurance company. I have even had insurance companies send me a letter, outlining an incident and loss they had incurred, and requesting that we send them a check for $100,000 as quickly as possible. Such situations at first glance were absurd, but because they did it you had to wonder how many companies would just take them at their word and mail the check. In some situations there might even be a call from an attorney representing another party, who at this point has not filed a lawsuit against the manufacturer. The attorney might be hoping the manufacturer will hear what allegedly happened and be willing to offer to settle the incident without the other attorney having to build a case and file a lawsuit. Those were many times my best situations, because the attorneys did not fully understand the product nor the credibility of the allegation and were often open-minded and willing to accept other theories, even if it meant dropping their client and potential case. In one respect, there was little sense in them spending a lot of time trying to put a case together, if I could convince them it would all be in vain.

15.2

IN-HOUSE AWARENESS TRAINING

317

One of the most troubling scenarios is when a product catastrophically fails, starts on fire, structurally or mechanically fails, or fails in some other manner that could have caused property damage but luckily did not, and the customer notifies the assigned account manager who in turn agrees to replace the product for the customer, but never tells anyone else about the failure. The account manager satisfied their customer’s needs, and therefore feels they did their job. Then, at a later date, another product fails in the same manner, only this time the failure does result in property damage, personal injury, or worse, and the company is sued. During the Discovery stage it surfaces that this was not the first time the product failed in this manner, and the in-house expert and defense attorney are caught off-guard. A typical problem that exists within a company is that when any of the employees do gain knowledge of an incident, they do not immediately recognize the potential liability implications, many times do not know how to handle the situation when they are receiving the call, nor do they know who to tell within the company about a possible liability incident. Many times it is a customer service representative or account manager who first gains the knowledge of an incident that does not result in personal injury or property damage. A customer service representative’s primary goal is to show compassion toward a customer’s problem, and immediately service the customer in any way that they can. If a product failed, they arrange the repair or replace the product. But if that failure is a red flag for another incident yet to happen, who else is being told about it?

15.2 IN-HOUSE AWARENESS TRAINING It is necessary for every company to begin by holding training and awareness sessions with all of the employees that talk to outside contacts, and could therefore be made aware of an early liability incident. The in-house expert should conduct the training and kickoff the Product Liability Prevention effort. As part of such a session, they need to learn how to immediately recognize a potential product liability incident when it is called in, aside from the other types of product calls they will normally receive, and how to document what is being told to them. In many situations, this first communique´ of an incident can be more revealing than anything else that may be said in the future. One of the primary reasons for this is because as time goes on and the situation continues to develop, witnesses and participants may begin to realize that the incident will likely become a lawsuit, and therefore no longer want to get involved. Or in fact an attorney may enter the picture and may tell the individuals not to have any further contact with anyone. So this initial communication can be very important to the in-house product liability expert in helping to gather the initial facts. The first thing the in-house expert should do is create a report form to show to the group that they should immediately pull from their file and begin to complete as soon as they receive such a phone call from an outside contact or are made aware of an incident that they think could become a liability to the company. The following form in Box 15.1 is a good example of what the form should look like.

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CLAIMS AND INVESTIGATING INCIDENTS

NOTICE OF POTENTIAL LIABILITY INCIDENT

Reported by: ____________________

Date:______________________

Name of contact reporting incident to you: __________________________ Who is this contact:__________

Phone No.(s) ______________________

(Customer contact, store owner, distributor, etc) ____________________ Where is this contact located:____________________________________________ Other parties who may have knowledge of the accident or incident (if known): ______________

___________________

____________________

Name

Position

Phone

______________

___________________

____________________

Name

Position

Phone

Company Product:__________________ Customer:____________________ Means by which incident was communicated:

___Phone Call ___Conversation in person ___Letter or fax (attached) ___Other ___

Type of incident being reported:________________________________________ (Personal injury, fire, property damage, etc) Date of incident:__________________ Location:______________________________________________ Details as presented: _______________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ __________________________________________________________________________ Please forward this form to our In-House Product Liability Expert

15.3

PREPARING FOR AN INVESTIGATION

319

BOX 15.1 NOTICE OF POTENTIAL LIABILITY INCIDENT The employee should document who it is that they are talking to, that individual’s contact information, which product is involved, what exactly happened and when, and then they should tell the individual that they will pass this information along to the company’s expert that handles such situations, and that individual will be calling them back to get more information. The employee should only be in a mode to record what is being stated when they recognize the type of call they are receiving, as opposed to offering any information to the caller. For instance, maybe the company is aware of a problem product that was either designed or manufactured poorly, and anticipated the likelihood of having to deal with some of the customers. If a customer calls and just says the product quit or is defective, the employee can handle such a call in the usual manner and coordinate a corrective action. But if the employee receives a call regarding the same product, but is told the product failed or malfunctioned in a more serious way, then the employee needs to recognize the possible problems and handle the call in a completely different manner. At that point the employee should immediately get the form to the in-house expert and discuss what they know. Many such situations may not be anything serious or anything that will develop into a lawsuit, but that should be something the expert decides, as opposed to the individual that took the call.

15.3 PREPARING FOR AN INVESTIGATION When the PL expert is made aware of a potential product liability incident, depending on the nature and extent on the incident, the expert needs to make the necessary plans to investigate the situation as quickly as possible. The key to possibly stopping an action in its tracks is to act fast. If the situation is an insurance claim, say for instance a fire, and the company is covered by insurance (as opposed to being self-insured), then the PL expert needs to notify the carrier that he intends to investigate the incident, and see if the insurance company wants to have a local representative of theirs attend as well. In most cases that is what they will want to do. The insurance carrier will call the PL expert back with the name of the local claims representative they want to accompany the expert during the visit. Prior to making the trip the PL expert should call the local representative, bring the individual up to date on the incident, and them make the necessary arrangements to meet with the individual and other parties and conduct the first investigation of the incident. In some situations I have received calls from attorneys that were representing the individual in what was being reported as a personal injury incident, normally of a lesser degree, but it was not a lawsuit nor were they threatening any type of action at that point. They were merely notifying me of the fact that someone had brought the incident to their attention, and the attorney was then bringing the situation to my attention, presumably in the hopes of a quick agreement to accept their costs and losses. In this type of a situation, I normally went by myself to meet with the

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attorney, view the product, and hear all the facts, and did not necessarily bring the insurance company along, although we might have made them aware of the fact that we were going to go and check it out. If the other party had an attorney and made it clear they would pursue legal action, or already did, then the PL expert needs to contact the insurance carrier and not only find out who the local insurance company representative will be, but to have them also line up a local attorney to be onsite with the expert during the meeting and investigation. If the company is self-insured, or has a high deductible, then the expert may be taking along the company’s own PL attorney. The objective here is to have the opportunity to view the product firsthand, as opposed to looking at pictures and reading reports, and to fully understand the setting and everything that lead up to the final event. It is a fact-finding mission at this point—an opportunity to clearly understand all of the facts, record what is exactly being said, and photograph everything possible. But it is also the opportunity to recognize if there is a problem with the whole scenario, and have the opportunity to convince the other party(s) of the improbability of what is being alleged, hopefully stopping the action in its tracks. That is the ultimate goal. Get the other parties to understand why this could not have happened the way it is being reported, and convince them not to pursue it any further against your company. In some fire situations, I was even able to surprise the other parties with the fact that the product they were looking at was not even ours, but that of a competitor that made the same type of product. At my public seminars I would hear stories from attendees on how they were able to reveal the same. If what the expert is seeing and hearing seems credible, he needs to immediately get back and launch a corrective action. This is the ultimate quality failure of your product. If you recognize that there is a potential problem, you need to initiate a corrective action to stop the possibility of more events. This might involve shutting down production, putting inventory on hold, or even initiating some sort of safety notification or recall. 15.3.1

Maintaining an Atmosphere of Cooperation

When the company’s PL expert first arrives at the scene or meeting place, the individual must be very diplomatic, friendly, positive, open, and nonchallenging. This is crucial if you ever hope to successfully gain all the available information surrounding the incident, and especially if you hope to convince them that the case is without merit. Remember, the primary objective of the trip is to gather and understand all of the facts that are being presented. What you are being told on this day you may have to remember for years to come. When all the various parties first get together, none are sure of what to expect of the other. In some situations, especially personal injury cases that already involve attorneys, the attorney for the plaintiff could be very friendly and open, or could be very unpredictable and potentially threatening. I have had attorneys that were very friendly and open to any discussions, others that were very confident in their convictions, and still others that would agree to the meeting and allow certain questions to be asked of their client, but would threaten to shut the meeting down at the least provocation. In order to be successful in the mission, you have to be able to read and identify what you are dealing with in about the first 10 seconds.

15.4

GATHERING THE FACTS

321

It also is not typical for a company to send their own people to investigate such incidents. This is normally handled by just the insurance carrier, or attorneys representing the insurance carrier and manufacturer indirectly. So in many cases, the other parties do not quite know what to expect from the company employee, but may speculate that the individual came to offer some sort of settlement, once he sees what has happened. Of course, this is almost never the real situation, and even if the company ultimately does decide to settle the incident, the PL expert will in all likelihood be totally unprepared for such a discussion. Again, it is primarily intended to be a fact-finding mission. The company is concerned about what is being reported, and wants to see it first hand.

15.4 GATHERING THE FACTS In the initial trip, the PL expert wants to see the product (or remains of the product), the setting, and understand exactly what is alleged to have happened. The following is a list of typical questions the expert should look to be answered: † † † † †

†

†

†

† † † † †

Is the product definitely the company’s? Note the date code and any other company information shown on the product. Where was the product actually placed? How did it get to this location? Was it sold directly to this location? What happened in the days, hours, minutes, and even seconds leading up to the event? If a person was injured, what precisely were they doing with the product in the seconds leading up to the incident? (Understand every physical movement.) If the product was alleged to have started on fire, were there any signs of the product failing in the days or hours prior to the event that would indicate it was heading in this direction? If the product was involved in a fire, what else was in proximity to the product that could have been the ignition point, if not the product itself? What time and date did the event happen? Did anyone witness the event? Look at how the product was installed. Was it installed properly? Does the product appear to have been made per drawings and specifications? Does the product appear to have been repaired or altered?

Finally, photograph everything! These are just some of the questions the PL expert needs to answer during the investigation. Remember again that it may be the last time you visit the accident site and view the product for years, if it already is or becomes a product liability case. As incidents continue the path into litigation, stories have a tendency to change and some of the accounts tend to get manipulated, favoring the plaintiff.

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Potentially foolish actions get left out, and only proper and innocent actions inserted. This is why it is so critical to have this initial meeting quickly, ask all the pertinent questions, and document everything being said. The other parties may unconsciously or carelessly admit to things that even catch their own representatives by surprise. Always keep in mind, however, that if the other attorney feels that you are beginning to interrogate their witness, they may instantly become hostile and change their attitude toward this whole investigation and stop it from proceeding. So proceed in a sincere and cautious manner. I have found in almost all of my personal injury investigations that the most revealing facts are the second-by-second reenactments of the claimant’s physical actions leading up to the actual event or injury. In many cases I find that their own attorney is not even that aware of the whole story until I get them to describe it. Once I hear exactly what they supposedly did, and have viewed the product, I can begin to determine the credibility of the case.

15.5 INSPECTING THE EVIDENCE At the time that this meeting is arranged, the PL expert wants to make sure that the alleged defective product is also going to be there. In cases of fire, for instance, many times the claimant’s insurance carrier, or some other party, may have the suspect product elsewhere, being held or analyzed. You want to ensure that you will have the opportunity to view the product in the same trip, and not have to make a second trip in order to write the other half of your report. The inspection of the product is a key element. The company’s PL expert should have a strong technical background and thorough knowledge of the specifications and characteristics of the product in question, as well as how the product should perform under any adverse conditions. The first thing the expert should want to do is see the product. Is the product definitely yours? Does the product look to be in original condition, or are there signs of it being altered? Are there any signs of apparent failure? Of course, if the product was involved in a fire there might not be much to look at. But say it is an electrical product that is alleged to have shocked someone, or shorted out and started smoking, in those situations there may be signs of electrical failure. For a mechanical or motorized product, pretty much the same applies. Does the product appear to have been made per specification? Are there any signs of it being altered? It is important to keep in mind that when you are inspecting your product, the other parties are likely to watch your every move. In many situations at this point they allege that the product was defective and malfunctioned in some manner, but they are not likely to know for sure, nor in most cases have they spent any money on hiring other experts to inspect the product, so they are not likely to know what is wrong with the product, if anything. So they are going to watch what you are looking at, and want to know what you are finding. If in the inspection of an electrical product that was alleged to have shocked someone I spotted a [manufacturing] defective condition that might have caused the incident, I would avoid drawing attention to the defect, but capture the area in

15.5

INSPECTING THE EVIDENCE

323

one of the many photographs I took. This might be the same for a mechanical or motorized product if I spotted something that did not appear to be in compliance with specifications. The intention is to gather all the facts and have the opportunity to view the product, and hopefully be able to convince them that the product does not have any defective condition and could not have been the cause of the incident, as opposed to handing them a case on a silver platter. After the PL expert hears all the alleged facts leading up to the event, and has had the opportunity to inspect the product, if he is absolutely certain that this scenario is not credible, this is the time to explain everything to the other party(s) and convince them as well. Convincing the other parties that your product is not at fault is the ultimate success of such a trip, but it has to be handled in a sincere and technically convincing manner. At this early point, the other parties are often not typically steadfast in their opinions, and are open to reasonable discussion, even if it means that they do not have a case or will be returning to square one in their search for the real cause. Even if the victim of a personal injury incident is there with their attorney, the company’s expert can ask for a private conversation with the attorney, and make an attempt to convince the attorney that his client is not telling him the full story, and that this was an absolute case of negligence on the plaintiff’s part. The key in all of this will be how the expert describes the technical aspects and characteristics of the product, and the expert’s sincerity and diplomatic capabilities. I have met with attorneys at their offices, with the injured party, and electrical product right there, listened to the story the injured party described, inspected the product, and then asked if I could have a few minutes alone with the attorney, then explained to the attorney why his client’s story did not make sense, explained how the product worked and the safeguards that were built into the product, and convinced the attorney that his client had to be doing something with the product that he had no business doing, which led to the injury. The attorney then thanked me for my time and dropped his client. In a fire case, if I had the ability to walk through the charred remains of the building, see the product and where it was located, view the burn patterns and hear why they considered it to be the source of origin, but at the same time ask questions about all the other items in the vicinity of my product as well as be able to study the burn patterns myself, it could help me to build a defense if I truly did not believe the product was capable of starting the fire. In fire cases, if you sit back and wait for the case to develop before you begin any inspection, a burned-out building will have been totally rebuilt by the time you enter the picture, and all you will be able to view are the reports they have written and the pictures they have taken, which will place your product right in the heart of the origin. In fire cases it is the insurance carrier’s first objective to get their client back up and running, before they go looking for subrogation, so if you happen to be lucky enough to have received the call before the reconstruction takes place, it is imperative to get to the site, view the remains, and take your own pictures. Unfortunately there will also be the case where you do spot a defective condition in the product, either a manufacturing defect, or identify it was one of the previous models that was found to be defective in design. In these situations I would recognize the problem but avoid drawing attention to it. I would pursue all the needed

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information, take all the pictures, get a full account of what happened, thank everyone, and leave. My trip report would merely note everything that was said and presented, minus the revelation. Once I was back at the office I would quickly have a meeting with key people and explain what was found. As the incident was in its earliest stages, I would have someone, or myself, ask the amount the other party was looking for, and try to settle for the lowest amount possible, without ever revealing the defect. In any situation, the primary objective of the trip is for the PL expert to see the product, understand the scenario, and gather all the facts. Naturally if there is a problem with the product, the company should want to quickly respond and get the defective condition corrected before any more incidents happen.

15.6 WRITING A REPORT When the PL expert is at the scene, he needs to begin noting all the facts as part of his report, and possibly finish the report on the return flight while everything is still fresh in his memory. The PL expert must always remember that if this was a prelitigation inspection, once the claim enters into litigation at a later date, this report will be one of the first things requested by the plaintiff in the request for documents stage. So it is best to ensure all the facts that were presented, for example, where the product was, what the party did with the product, what the scene looked like, dates and everything else pertinent, is incorporated into the report, but possibly leave personal opinions out of the report unless the expert is totally convinced that the cause was not the fault of the product or company but the fault of the end-user or someone else. If you do have an attorney, the report could be protected by attorney – client privilege. It is also important to remember that in either situation, whether the incident is already in litigation, or stands a good chance of heading there, the case will in all probability be around for years to come. It is extremely common for a product liability case to be active for at least three years, if not as many as five to ten. It becomes impossible to try to remember everything that was stated or viewed in an investigation between three and five years ago, so a good thorough report is what the PL expert needs, in the event he has to revisit the report two to three years later and try to remember all that was discussed or reviewed, especially if the expert has other claims to handle. It is extremely easy to begin mixing the details of one incident with those of another. There should not be a problem turning over an investigation report, if all that is documented is what you were told. The facts are the facts. One of the distinct advantages of such a report will be that it will serve as a deterrent for anyone to try to change the story as time goes on, and the pictures will capture the true condition of the product at the time of the investigation, in the event that it too is suddenly altered at a later date. One of the major insurance companies did a study in the Spring of 2006 of the number of product liability insurance claims they were dealing with for the previous four years, just to show how long the cases persist. Table 15.1 shows the number of cases presented each year, and the years it took to finally resolve them.

15.6

WRITING A REPORT

325

TABLE 15.1 Table of Claims Activity by Calendar Year—Product Liability Accidents 2002–2005 Year of Activity

Total

2002

2003

2004

2005

2006

2002 Created 2002 Closed 2002 Still open 2003 Created 2003 Closed 2003 Still open 2004 Created 2004 Closed 2004 Still open 2005 Created 2005 Closed 2005 Still open

97 44 53 134 30 104 118 25 93 66 4 62

31 1

27 5

24 14

13 21

2 3

47 3

56 12

29 14

2 1

69 3

47 19

2 3

63 2

3 2

15.6.1

In Conclusion

Conducting an accident investigation is truly a positive move for the manufacturing company, as opposed to turning the situation over to the insurance carrier for them to handle for you. If the product truly has the ability to malfunction, cause damage or injury, the company should definitely be interested in knowing that and reacting to what they learned in an immediate fashion. On the other hand, if the product truly was not defective, nor was it possible for the product to have done what is being alleged, this is the best time to be there and make that fact known to other parties. Once insurance companies or attorneys put enough time into building a case against your product and company, it will be too late to convince them that the allegation has no merit. Although the information gathered on the scene and in the earliest stages of an incident can become invaluable in your defense, it must be remembered that even to win in trial will be extremely expensive, so the real win is convincing the other parties that the alleged malfunction was not possible, the product was not defective, and it would be futile to pursue it.

16 Entering into Litigation

When a company receives a formal complaint from the court, it becomes official that they are being sued, and they enter into litigation. In the complaint, all parties involved will be identified, including the plaintiff and any other codefendants, and the complaint will identify the nature of the case or complaint. The defendant (manufacturer) will be given a specific number of days to respond. The attorney for the manufacturer will respond to the complaint by filing an answer to the allegations made in the complaint. The defense attorney must either admit or deny the allegations in the complaint, or state that the defendant has insufficient knowledge to admit or deny the charges at that point. If no answer or other responsive pleading is filed within the time allowed by law, the court may enter a default judgment in favor of the plaintiff. The next stage in litigation is discovery, allowing all parties to request information from the other that is relevant to the action. Discovery will consist of a court order to answer a written questionnaire (interrogatories) within a specific number of days, which will include or be followed by the request for documents, and ultimately a number of individuals involved with all the parties will be questioned under oath (depositions), and these questions and answers will be recorded and could then be used as evidence in the trial. In answer to the plaintiff’s complaint, the defendant may, instead of filing an answer, file pretrial motions, which are responses to the complaint but do not constitute an answer. Many of these responsive motions must either be filed before the answer, or included within the answer, or they are waived.

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

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Approximately 96 percent of civil cases do not go to trial, and either settle before trial, or during trial. If all issues in a lawsuit have not been resolved either by settlement or by motion or dropped, the remaining issues must be decided by trial.

16.1 SELECTING THE DEFENSE ATTORNEY One of the first things the manufacturer will quickly need to do in a product liability case is retain a defense attorney. If the company is insured, this will be handled by the insurance company, unless the manufacturer has made other provisions, such as what was recommended in Chapter 12 on administration. Again, the typical arrangement is for the insurance carrier to select a law firm to represent the manufacturer in the same geographical area as the product liability case. The defense attorney will not know the manufacturer, nor be familiar with the company’s products, but will be an attorney with some product liability experience. Even if the insurance company does appoint the attorney, the manufacturer should have the ability to accept or reject the attorney selected, if pursued by the manufacturer. The expert and team should instantly research the attorney and firm being selected to determine the amount of experience the selected attorney really has in product liability. Has the attorney tried a number of cases and won? Or has the attorney only handled a few cases, and lost. Or has the attorney handled a few cases, and settled. Or worse yet, does the attorney lack any product liability trial experience. The manufacturer has a vested interest in knowing this, so the manufacturer should not just accept what is being handed to them without any questions or investigation. It should also be known to the expert and team that the attorney selected to represent the manufacturer will really have the insurance company’s best interests in mind, not necessarily the manufacturer’s. Keep in mind that if the manufacturer is pretty much insured dollar-one, or fully insured, the money really being spent here is all from the insurance company, not the manufacturer, so the attorney will be under the direction of the carrier. If the manufacturer had $100,000 or $1,000,000 deductible, then the manufacturer will largely be paying for the defense, and should really pursue their own attorney, although the insurance carrier will still handle the selection and management for the manufacturer, if the manufacturer requests it, which many finance department heads might tend to do out of simplicity. The best thing for the company to do is to already have a national law firm retained that has been working with the firm and select attorney for years prior to the litigation, so the expert attorney could now step in and handle the defense. Even if the manufacturer is fully insured they might consider hiring their own defense attorney, which the carrier might pay for, or pay some percentage of, as opposed to just being handed an attorney by the carrier. Of course, if the manufacturer already has an in-house legal department, that department will likely hire attorneys across the country to handle the defense of the corporation.

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16.2 PRODUCT LIABILITY (CIVIL CASE) TRIAL PROCEDURE Depending on the type of action, a case may be tried before a judge (bench trial) or before a jury with a judge presiding. The common number of jurors is 12, but some states allow a smaller number if the parties agree. For a plaintiff to win a civil lawsuit with a jury, three-quarters of the jurors must find in the plaintiff’s favor. Whether a judge or jury tries the case, the procedure is essentially the same. At the trial’s beginning, the clerk calls a panel of prospective jurors. The judge, or in some cases the lawyers, ask the potential jurors questions about their background and general beliefs to determine any biases or prejudices. This process is called voir dire. If any attorney or judge feels that a juror is not qualified for the case, the juror is excused “for cause.” There is no limit to a party’s challenges for cause. Both sides are also entitled to a limited number of “peremptory challenges,” which means they may excuse some prospective jurors without stating any reasons (unless the motive appears racial). When the jury has been impaneled, attorneys for each side make opening statements to inform the court and jurors of the nature of the case, the evidence they will present, and the facts they expect to prove. The defense may choose to wait to make an opening statement until after the plaintiff has rested its case, or may choose not to make an opening statement. Each side makes its case based on testimony from witnesses and physical evidence. The plaintiff calls its witnesses for direct examination to state what they know about the alleged injury. The defense may ask questions of the same witnesses (cross-examination). Then the plaintiff may reexamine their witnesses (redirect). Physical evidence, such as documents, pictures, and other exhibits, are introduced at this time. After the plaintiff has rested its case, the defense may call witnesses to give testimony to disprove the plaintiff’s case and to establish the defendant’s case. The plaintiff may cross-examine the witnesses. The defense may then reexamine its witnesses. When the defense has presented all its witnesses, the plaintiff may again call witnesses to rebut any new information introduced by defense witnesses. The judge may allow surrebuttal (a rebuttal to the rebuttal) by the defense. Before closing arguments, the judge instructs jurors carefully as to what law they are to follow. In civil cases, the jury must determine that a preponderance of the evidence favors one party. In criminal cases, the defendant must be found guilty beyond a reasonable doubt to be convicted. After jury instructions are given, both attorneys summarize the evidence and testimony in an effort to persuade the judge or jury to decide the case in favor of their client. The plaintiff makes its closing argument first, then the defense, and then the plaintiff responds to the defense’s closing argument. Either side may waive closing arguments. After closing arguments, the court orders the jury to retire to the jury room for deliberations. A verdict is reached if a certain percentage of the jurors agree to a verdict. In criminal trials, the verdict must be unanimous. In civil trials, the verdict can be less than unanimous. The verdict percentage and jury size varies depending on the state.

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If the jury cannot reach a verdict, the judge may declare a “hung” jury and declare a mistrial. In civil cases, two types of verdicts are rendered—general and special. In general verdicts, the jury has decided the case either in favor of the defendant or the plaintiff. In special verdicts, a general decision is not announced. Rather, the jury has answered certain factual questions, leaving the “total” decision up to the judge. After the verdict, or after the court has decided the facts in a bench trial, a judgment is rendered. The court will award money damages or injunctive relief. Appellate and supreme courts may review trial-court judgments. The civil-litigation process described above can also be viewed as a probability game.

16.3 APPELLATE PROCEDURE If either party to a case is dissatisfied after the trial court renders a judgment, that party can file an appeal in an appellate court. The party who files the appeal is called the appellant, and the other party is called the appellee. Both the winning party and the losing party have a right to appeal in a civil case. For example, the winning party might think he/she did not receive as much money in damages as the case warranted. The losing party might think a judgment should not have been entered against him/her. The party who files the appeal has the burden of convincing the appellate court that the trial court committed a procedural error or an error in its interpretation of the law. “Appellate procedure” refers to the rules and practices used by the appellate court in reviewing a trial court’s judgment. “Standards of review” refer to what the appellant must show in order for the appellate court to reverse or overturn the trial court’s judgment. The appellate court reviews a judgment to determine if substantial evidence supported the trial court’s decision. If not, the judgment will be reversed. “Abuse of discretion” is another standard of review. Under this standard, the appellate court looks at whether the trial judge properly exercised his/her judicial discretion in making a ruling in the case. The “harmless error standard” means that a judgment may not be set aside for insignificant errors that do not influence the outcome of the trial. Under the “clearly erroneous standard,” the appellate court has authority to review the trial court’s factual findings. “De novo review” refers to the authority the appellate court has to review the trial court’s conclusions on questions of the application, interpretation, and construction of law. The “plain error doctrine” allows an appellate court to review errors not preserved in the record when those errors would result in a miscarriage of justice or seriously affect the basic fairness, integrity, and public reputation of the judicial. The federal appellate courts are governed by the Federal Rules of Appellate Procedure. State appellate courts are governed by their state’s rules of appellate procedure. In general, the appellant files a notice of appeal. The appellant must submit a trial court record, which includes a transcript of the trial. Both sides prepare written briefs that state the questions raised on appeal. Briefs contain arguments to support each party’s position. They include citations to legal authorities that support the

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arguments made by each side. Most appeals are decided on the briefs submitted by the parties, but a few states permit oral argument in every appeal. If an oral argument is held, the appellate court questions the attorneys for both sides in order to clarify the legal issues presented in the briefs.

16.4 DISCOVERY: INTERROGATORIES As defined earlier, interrogatories are a formal set of written questions propounded by one litigant and required to be answered by an adversary in order to clarify matters of evidence and help to determine in advance what facts will be presented at any trial in the case. The vast majority of such questions are to find background information about the litigants that is not specific to each case, so it is common to use preprinted forms containing standard questions that are generally relevant to the type of case at hand; these are called form interrogatories. These may even be determined by statute or court rules. The following are examples of the types of questions a manufacturer might receive and be under court order to answer: †

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Identify each and every individual who may have a role in the design and engineering of this product. Identify each person who may have specific knowledge of the manufacturing process. Describe all applicable government, independent agency, trade, industry standards, codes, or regulations that may pertain to this specific product. Identify any individual, consultant, company, or laboratory that may have performed an evaluation of the product, and who may have had input into the design of the product. Identify all quality control documents that would have contained information pertaining to the manufacture of this product. Identify any reliability tests that may have been performed on the product, along with the names of the individuals that performed such tests. Identify any and all quality control personnel who would have been involved in the inspection of the product during manufacture. Describe any changes or improvements that may have taken place regarding the design or engineering of the product in question, from a period of three years before, until five years after. Identify the quantities of the product that were produced by day, month, and year since the product’s conception. Identify the extent of all customer complaints that have been received regarding this product line.

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Identify all individuals that have become involved in this incident, have detailed knowledge of the incident, or maintain certain facts or opinions regarding the incident. Identify all individuals who would be expected to testify on behalf of the defense, the nature of their testimony, their background and experience, and current positions. Set forth in detail the facts on which you base each of your defenses, including the names and addresses of any individuals who may have contributed to these facts and opinions. If you allege that the plaintiff is guilty of contributory negligence, state the facts and opinions on which you base this defense.

This is just a brief example of the kinds of issues that could be raised in the interrogatories. The interrogatories will help supply the plaintiff with information so as to better understand the product and more importantly begin to recognize what documents should now be requested and who they should ultimately depose. The PL expert will assist the defense attorney in answering these questions.

16.5 DISCOVERY: REQUESTS FOR DOCUMENTS The next request will be for all the relevant records and documents that could help the plaintiff build their case against the manufacturer. As stressed previously, this is where the dangerous documents are likely to surface. A sampling of this list might include the following: † † † † † †

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The instruction manual supplied with the subject product; Written safety instructions and warnings supplied; Photographs and blueprints showing location of warnings; Blueprints and/or design plans of product; All memoranda reflecting optional equipment or safety devices offered; Any documents or memoranda reflecting modifications made to the subject product prior to its sale; Records of sale between you and the purchaser; Any records of repairs performed subsequent to the sale; Any records of repair parts sold for the subject product; Written records of all inspections made of the product prior to the accident; Written records of all inspections made after the occurrence; All witness statements obtained by you by prospective witnesses; All photographs in the possession of you, your attorneys, investigators, or claims representatives;

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All written accident records; Written standards, codes, and regulations that you consulted in your design of the product; All written records of indemnity agreements between you and all records and memoranda reflecting testing done by you or other parties on the product line; All records of testing conducted subsequent to the incident; All and any other record regarding the product; All written records or memoranda that analyze accident incidents on products of the same type; All written records, letters, or memoranda between your company and dealers, users, or owners of the subject product; Copies of advertising brochures, pamphlets, or other advertising material used to sell the product; Organizational charts showing the management hierarchy at the time the product was first produced, and at the current date.

This request could involve thousands of documents having to be surrendered, including all those that exist electronically. The PL expert will spearhead the collection of all these documents with all the departments within the company. The manufacturer will have a required number of days to put all of these together and turn them over to the plaintiff. 16.6 DISCOVERY: DEPOSITIONS Based in large part on the answers supplied from the interrogatories, the attorney for the plaintiff will now begin to depose various individuals affiliated with the manufacturer. As stated previously, the person to be deposed (questioned), known as the deponent, is usually notified to appear at the appropriate time and place by means of a subpoena. A court reporter, also known as a stenographic reporter (sometimes denoted CSR for Certified Stenographic Reporter) is present and begins the proceedings by administering the same oath or affirmation that the deponent would take if the testimony were being given in court in front of a judge and jury. Thereafter, the court reporter makes a verbatim stenographic record of all that is said during the deposition, in the same manner that witness testimony is recorded in court. Many CSRs nowadays also make an audio or video recording. Somewhat similar to the request for documents, this too can be loaded with potential problems for the manufacturer and opportunities for the plaintiff, because of the uncertainty of how various members of management might act or respond to questions under such pressure. Successful handling of depositions is a skill or trained behavior. Part of the plaintiff’s objective naturally is to gain answers to specific questions, but the other strategy is to make the deponent nervous and uneasy, which might then lead them to reveal far more than than what they could have obtained by asking

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the same questions in an interrogatory, and there lies a potential problem. Engineers, customer service employees, and various managers can become so nervous when asked specific questions under oath from directly across the table that they give more than the required answer, and begin to offer all kinds of additional information, which the plaintiff can have a field day with. One of the things I immediately tried to pursue when investigating incidents in the earliest stages of litigation was to establish myself well enough so they would depose me when we finally reached that stage, as opposed to pursuing others within the company. If I could show that I knew everything about the product they would likely ask about, it would help to make it simpler for them. I also knew how to handle questions in a deposition. The key strategy is to just answer the question, as briefly as possible. If the company had manufactured a number of different model products that were very similar in nature, but had different model numbers, and the others had reported accidents but this was the first reported accident with this specific model, and the plaintiff asked “Have you ever had any reported accidents with this product before,” the answer is “No.” Period. You do not qualify your answer, you do not answer the question and open the door to another, you just answer the specific question, and the answer would be “No.” If the plaintiff were to ask if there are other models that are similar, and if there were ever reported accidents with them, then that is a different question, and the defense attorney would likely “object.” In most situations, I became the recognized representative for the company, so the plaintiffs just deposed me.

16.7 PREPARING FOR TRIAL: TESTIFYING EXPERT v. NON-TESTIFYING EXPERT One of the things the Defense Attorney and the in-house expert have to think about as the case begins to develop is who they are going to use as experts and as an expert witness in the trial. The in-house PL expert can make an excellent testifying expert, if the individual can present themselves well, and is highly knowledgable of all the technical aspects of the product. The jury could really like the company’s PL expert, which could put the company in a favorable light, but the company’s PL expert might not know all the answers, or be limited in his ability to stand up to the plaintiff’s hired gun, which might lead to the company having to either find a better testifying expert from within, or seek one from the outside. Another issue that could be a problem relates to the scenario described in Section 16.6; that is, the PL expert is not only likely to be highly knowledgable about the product, but will also be highly knowledgable about all the other problems the company has had. So if the plaintiff asks the right questions while the individual is under oath, the PL expert will be required to answer them, which could lead to embarrassing problems for the company, whereas the hired testifying expert knows nothing more than the design and characteristics of the product in question. So, if it is known up front that there could be problems in the witness chair, then the PL expert and Defense Attorney should begin to look for someone else to testify, and the PL expert could function as a nontestifying expert.

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16.8 PRETRIAL STAGE: MANDATORY SETTLEMENT CONFERENCE This is a court-ordered conference in which the parties attempt to informally resolve or settle a lawsuit out of court, typically within 30 days of the trial date in a last-ditch effort to resolve the matter short of going to trial. The hearing will typically be in the Court building. A temporary judge will hear your Settlement Conference. Temporary judges (called “Pro Tems,” short for pro tempore) are lawyers with a lot of experience. They volunteer to be the judges for your Settlement Conference. If the parties involved cannot reach a settlement, then the case proceeds to trial.

16.9 PRETRIAL DEFENSE STRATEGIES: MOTION IN LIMINE “Motion in limine” is a motion filed by a party to a lawsuit that asks the court for an order or ruling limiting or preventing certain evidence from being presented by the other side at the trial of the case. Generally, this motion is filed in advance of the trial, but a motion may be entertained by the court during a trial, before the evidence in question is offered. The purpose of this motion is to prevent the interjection of matters that are irrelevant, inadmissible, or prejudicial. Most objections to the admissibility of evidence are made when the evidence is offered at trial. Thus, the jury usually hears the question and the witness’ answer before the objection is made or hears the other lawyer discuss this evidence in his opening statement. The reason these motions are filed in advance of the trial is to prevent the other party from offering the evidence in front of the jury. Once the evidence is offered, the cat is out of the bag and cannot be put back in. Sometimes, the evidence that is sought to be excluded by a motion in limine might otherwise be admissible in court, but because of the nature of its content, might be so prejudicial to the other side as to warrant its exclusion. An example of this occurs when gruesome photographs are offered by one of the parties. Although those photos may show the legitimate nature and extent of the plaintiff’s injuries, they may be so disgusting and horrible as to unduly influence the jury’s decision in favor of the plaintiff. Thus, courts frequently grant motions in limine to exclude such evidence. 16.10 16.10.1

DISCOVERY: DEFENSE STRATEGIES Courts’ Treatment of the Self-Critical Analysis Privilege1

In response to the proliferation of multimillion dollar product liability suits in recent decades, manufacturers increasingly conduct internal investigations designed to 1

Christopher Glade Johnson, Frost Brown Todd LLC, as Reported in Lexology.

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enhance product safety and to prevent costly litigation. However, problems may arise when a company conducts self-critical analysis, implements a safety program, and then is slapped with a high-stakes lawsuit. Aggressive plaintiff’s attorneys frequently request that manufacturers produce all documents related to any preaccident selfexaminations. Those lawyers then use the internally generated, self-critical documents to argue that a company knew about a product’s potential safety hazards. In an attempt to avoid production of documents created during an internal safety review, a company may attempt to argue that those documents are protected by the self-critical analysis privilege. Although some courts have recognized the self-critical analysis privilege, even more have rejected the privilege. Even those courts applying the privilege define it narrowly. Moreover, the requirements for invoking the privilege vary widely from one court to another. In summary, manufacturers cannot rely on different jurisdictions’ inconsistent application of the self-critical analysis privilege to shield them from disclosure of preaccident, self-critical documents. The self-critical analysis privilege was first recognized in 1970 by the District of Columbia.2 This privilege shields production of certain documents in an attempt to encourage socially beneficial, but self-critical, safety evaluations. The basic requirements for the privilege areas follows: first, the information must result from a critical self-analysis undertaken by the party seeking protection; second, the public must have a strong interest in preserving the free flow of the type of information sought; finally, the information must be of the type whose flow would be curtailed if discovery were allowed. Some courts also require that, in order for the privilege to apply, documents be prepared with the expectation that they will be kept confidential, and that they in fact be kept confidential. Voluntary preaccident safety reviews are often not protected by the self-critical analysis privilege. Many courts have rejected the privilege. Other courts that have substantively analyzed the privilege define it narrowly. Still others have left the question open. Neither the Supreme Court of the United States nor any Circuit Court has directly adopted the self-critical analysis privilege. When conducting self-critical analysis privilege, federal courts generally begin by asserting that the privilege does not exist in their Circuit and then go on to state that even if the privilege was recognized it would be inapplicable to the case before them. Courts within the Sixth Circuit have allowed use of the self-critical analysis privilege in limited circumstances.3 In Hickman, the court noted that “Although the Sixth Circuit has not passed on the question, the Circuit would adopt the ‘self-critical analysis’ privilege when faced squarely with the issue.”4 The documents at issue contained “candid and open discussions concerning plant safety issues.” The Court found that requiring production of the documents would “do great damage to this

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Bredice v. Doctors Hosp. Inc., 50 F.R.D. 249 (D.D.C. 1970). Hickman v. Whirlpool Corp., 186 F.R.D. 362, 363– 364 (N.D. Ohio 1999). 4 Id. 3

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Defendant’s efforts to improve safety and the efforts of business and industry in general.”5 In explaining its allowance of the privilege, the court stated that “The privilege encourages companies to continually monitor their safety measures and operations, with a view to correcting mistakes and improving safety.”6 The court also explained that “Public policy certainly favors protection of such items because such candid dialog and collection of data functions to reduce injuries and improve productivity. Therefore, this Court believes that the Sixth Circuit would adopt the privilege of ‘self-critical analysis’ when faced with the facts before this Court.”7 In summary, although some courts recognize the self-critical analysis privilege, most refuse to invoke it to limit document production when given the opportunity. Rather, courts often either reject the privilege outright, or distinguish the facts of the cases they are considering and hold that the privilege does not apply. Courts refuse to apply the self-critical analysis privilege far more often than they apply it. Even those courts that recognize the privilege have developed different criteria for deciding when it protects self-evaluative documents. However, at a minimum, a qualified self-critical analysis privilege may exist only if: (1) the party asserting the privilege can show the information is a result of a self-critical analysis undertaken by the party seeking protection; (2) the public has a strong interest in preserving the free flow of the type of information sought; and (3) the information is of a type whose flow would be curtailed if discovery were allowed. Courts often appear to be less inclined to protect internal studies than those performed by outside experts that clearly are beyond the course of management’s usual self-assessment. Given the inconsistency with which the privilege is recognized and applied, manufacturers generally should not expect the privilege to protect them against disclosure of documents resulting from pre-accident self-evaluations. Nonetheless, the corporate team should consider having their initial PLP audit handled by an outside expert, so the results have more of a chance of being protected, and the in-house PLP expert should pursue protection of all system audit records through the defense attorney as a standard defense strategy. 16.10.2

Defense Strategies: The Daubert Ruling8

(A description of the Daubert decision can be found in Chapter 3.) In conducting the deposition of the plaintiff’s expert, defense counsel should focus on several key areas related to the Daubert and Kumho Tire requirements. First, defense counsel should carefully explore the expert’s qualifications concerning the subject product or field of engineering. Keep in mind that the test of admissibility 5 Id. But see, U.S. ex rel. Sanders v. Allison Engine Co., Inc., 196 F.R.D. 310, 313– 314 (S.D. Ohio 2000) (citing Dowling, 971 F.2d 423) (stating that the privilege was not meant to apply to routine and voluntary internal corporate reviews, but declining use of the privilege on the grounds that it did not meet the Ninth Circuit Dowling test allowing assertion of the privilege). 6 Id. at 363. 7 Id. at 364. 8 Defense Attorney Neil Goldberg.

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under Daubert is not whether the witness is an expert in something, but whether he or she is an expert on the subject about which he or she intends to testify. Determine whether the expert has any formal education dealing with the subject product or field of engineering, if the expert has any employment experience with the product outside of litigation, and whether the expert has any experience in the design of manufacture of the product. Further, explore whether the expert has ever written or published an article concerning the product, and whether the expert has previously been qualified as an expert in federal court. A court is more apt to exclude the expert’s testimony if it can be shown that the testimony deals with matters outside the expert’s expertise. Even if a proposed expert is qualified, the expert’s testimony is admissible only if the process or technique he or she used in formulating his or her opinion is scientifically reliable. Defense counsel must consider and analyze the various Daubert factors in evaluating the reliability of an expert’s methods—the key issue under Daubert is whether the expert’s theory “can be (and has been) tested.” Identify what, if any, tests the expert performed on the subject product, or on an exemplar product, and whether the expert conducted any tests to replicate the circumstances of the incident. If the expert failed to test his or her theory, or conducted inadequate testing, than the court applying Daubert will exclude the expert’s testimony. Another factor is whether the methodology employed by the expert is generally accepted in the relevant field. For example, in a fire cause-and-origin case, defense counsel will need to explore whether the expert followed the basic methods used by all experts in fire reconstruction. That will entail a discussion of NFPA 921 and whether the expert’s conclusions are based on the scientific method. A history of the expert’s factual investigation must also be developed. Did the expert conduct a thorough factual investigation before reaching or reporting any conclusions? A basic investigation would include interviewing witnesses to the incident, interviewing investigation officials, reviewing investigative or accident reports, and documenting, photographing, and diagraming the accident scene and subject product. Courts in the post-Daubert era seek to determine whether an expert’s opinions are developed expressly for purposes of testifying, or whether the opinions arise out of research they have conducted independent of the litigation. Defense counsel should expound questions aimed at determining the purpose for the expert’s opinions and whether they were developed solely for litigation. The foregoing tips are by no means exhaustive. Each case will require an emphasis on different Daubert factors or other criteria of admissibility, and, in each case, defense counsel must consider and develop those factors that will create a record of the expert’s reliability. A plaintiff in a products liability lawsuit needs one or more experts to prove his or her case. A determination to exclude the expert testimony will often lead to a grant of summary judgment in favor of the defendant. The groundwork for the exclusion of unreliable expert testimony is framed by the expert’s deposition. The record created by a thorough expert’s deposition will give the trial or appellate court the ammunition necessary to evaluate the expert’s adherence to the Daubert standards.

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16.10.2.1 Going Beyond Daubert When the Plaintiff’s Regulatory Expert Offers Legal Conclusions and Inflammatory Rhetoric9 Plaintiff’s accident was caused by “a systemic disregard for safety, at all levels” and by defendant’s “reckless disregard for safety of its customers and gross negligence.” Defendant “demonstrated . . . an overall course of conduct contrary to responsible manufacturing and marketing practice, and willful and wanton behavior,” and “had the company eschewed subterfuge, and instead confronted legitimate risk concerns and engaged in what it knew to be responsible corporate conduct,” the accident could have been avoided. —Plaintiff’s Expert Stuart M. Statler, as quoted in Hayes v. MTD Products, Inc., No. 05CV-781, 2007 WL 2668589 (W.D. Ky. Sept. 6, 2007)

In today’s modern product liability litigation, plaintiffs frequently retain former government regulators as expert witnesses because juries often view these witnesses as credible and unbiased, and perhaps assume they reflect the views of their former agencies. These experts are asked to judge corporate conduct from the witness stand, and are often retained because they will offer legal conclusions couched in inflammatory language, thus giving plaintiffs a short-cut path to recovery. When faced with this situation, the corporate defendant must attack the admissibility of the proffered testimony, and in doing so, should go beyond the traditional Daubert factors used to evaluate the reliability of experts. Specifically, when determining the admissibility of an expert’s proffered testimony, it is appropriate for courts to consider whether the expert is an “expert for hire” who prepared his or her testimony solely for litigation purposes, and whether the expert’s opinion has veered into legal conclusions and corporate character assassination. 16.10.2.2 Traditional Daubert Factors When evaluating the admissibility of expert testimony, the court must first engage in a two-part analysis based on relevancy and reliability.10 The relevancy test is applied to determine whether the testimony will assist the trier of fact to better understand the evidence or to determine a fact at issue.11 The reliability prong of the analysis requires the court to consider several different factors, which were laid out by the Supreme Court in Daubert. Those

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Kevin G. Lohman, Reed Smith LLP. Johnson v. Manitowoc Boom Trucks, Inc., 484 F. 3d 426, 429 (6th Cir. 2007) (Johnson II) (“In its gatekeeper” role, the Court is “imbued with discretion in determining whether or not a proposed expert’s testimony is admissible, based on whether it is both relevant and reliable.”); Kumho Tire Company v. Carmichael, 526 U.S. 137, 147 (1999) (Federal Rule of Evidence 702 imposes a special obligation upon a trial judge to ensure that testimony is not only relevant, but reliable). 11 Fed. R. Evid. 702; Daubert, 509 U.S. 579, 591 (1993) (Rule 702 further requires that the evidence or testimony “assist the trier of fact to understand the evidence or to determine a fact in issue.” This condition goes primarily to relevance.) 10

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factors include the following12: † †

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Whether a theory can and has been tested; Whether the theory or technique has been subjected to peer review and publication; The known or potential rate of error and the existence and maintenance of standards controlling the technique’s operation; The extent to which a known technique or theory has gained general acceptance within a relevant scientific community.

Hayes v. MTD Products, Inc., provides a recent example of how courts first look at the Daubert factors in determining the admissibility of expert testimony from former regulators testifying against a corporate defendant.13 Hayes is a product liability action where plaintiff alleged that decedent, George Hayes, was killed when a riding lawnmower rolled over and crushed him. Plaintiff’s expert witness, Stuart M. Statler, is a former government regulator who previously served as a commissioner on the CPSC from 1979 until 1986. Since that time, however, he has served as an expert witness in a vast range of product liability actions, essentially becoming a professional expert witness. Statler proposed to testify that defendants should have installed a rollover protection system on their riding lawnmower and that failure to do so amounted to gross negligence.14 Applying the Daubert factors, the court determined that the first factor, whether the theory had been tested, weighed against admitting Statler’s testimony because he did not conduct any testing to determine whether a rollover protection system would have prevented the decedent’s injury.15 Next, the court determined that the second factor, peer review and publication, also weighed against admitting the testimony because Statler did not publish his conclusions; they were not subject to peer review.16 In fact, that Statler could not even cite to others’ publications that directly supported his position was also considered significant.17 As to the third and fourth factors, rate of error and general acceptance, the court acknowledged that they apply more narrowly to opinions based on a scientific testing process and thus were not applicable to the case at hand.18 Based on the four traditional Daubert factors alone, the Court concluded there was justification to exclude Statler’s testimony. 16.10.2.3 Expert Testimony Prepared Solely for Litigation Even though Daubert alone provided grounds for exclusion, the Hayes court also considered other factors in analyzing the reliability of Statler’s testimony in a way that may be instructive in other cases. 12

Daubert, 509 U.S. at 593–594. Hayes v. MTD Products, Inc., No. 05CV-781-H, 2007 WL 2668589 (W.D. Ky. Sept. 6, 2007). 14 Id. at  1 –2. 15 Id. at  2. 16 Id. 17 Id. 18 Id. 13

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The Supreme Court was clear to point out that the Daubert factors were not meant to be an exhaustive list.19 An additional factor routinely recognized by the Sixth Circuit in evaluating the reliability of an expert witness is whether the proffered testimony was “prepared solely for litigation.”20 Other Circuits, such as the Ninth Circuit, also have applied this factor as an addition to the traditional Daubert factors.21 If an expert witness is considered to be an “expert for hire” whose testimony was prepared solely for the purpose of litigation, courts have held that the witness must do more to get their opinion admitted, by proffering some objective proof supporting the reliability of their testimony. In Johnson II, for example, the Sixth Circuit noted that plaintiff’s proposed expert was the “quintessential expert for hire,” having spent the “last twenty plus years of his life testifying as an expert in a wide variety of design defect cases” regarding “almost any machine,” including a “wheelchair, a deep fat fryer, a passenger elevator, an antique replica shotgun, a hay baler, a meat tenderizer, a forklift, a manure spreader, a lawnmower, a seat belt assembly, a log skidder, a concrete saw, a trampoline, and a tree stand.”22 The court affirmed the decision to exclude the plaintiff’s expert witness, holding that “if a proposed expert is a “quintessential expert for hire,” then it seems well within the trial judge’s discretion to apply the Daubert factors with greater rigor . . . [and] the party proffering the expert must show some objective proof . . . supporting the reliability of the expert’s testimony.”23 Applying this standard to former government regulators offered as expert witnesses on behalf of plaintiffs, courts may require some form of objective proof that the regulator’s testimony is reliable beyond the fact that they have previously served on a regulatory agency. For example, in Hayes, the court recognized that although Statler was well-credentialed based on his years of service as a CPSC commissioner, he appeared to have become the “quintessential expert for hire” in the years since, and his testimony was prepared solely for litigation purposes as well.24 As a result, the court required some form of objective proof to support the reliability

19

Kumho Tire, 526 U.S. at 150 (these factors do not constitute a definitive checklist or test). See Mike’s Train House, Inc. v. Lionel, L.L.C., 472 F. 3d 398, 408 (6th Cir. 2006) (“We have been suspicious of methodologies created for the purpose of litigation.”); Avery Dennison Corp. v. Four Pillars Enterprise Co., 45 Fed. Appx. 479, 484 (6th Cir. 2002) (noting that courts have found experts to survive Daubert scrutiny if they are proposing to testify about matters growing naturally and directly out of research they have conducted independent of litigation.); Smelser v. Norfolk Southern Ry. Co., 105 F. 3d 299, 303 (6th Cir. 1997) (noting that the Ninth Circuit has added an additional factor to assist the court in its inquiry—whether the expert has developed their opinions expressly for purposes of testifying). 21 See Daubert v. Merrell Dow Pharmaceuticals, Inc., 43 F. 3d 1311, 1318 (9th Cir. 1995) (Daubert II) (“If the proffered expert testimony is not based on independent research, the party proffering it must come forward with other objective, verifiable evidence that the testimony is based on ‘scientifically valid principles.’”); Clausen v. M/V New Carissa, 339 F. 3d 1049, 1056 (9th Cir. 2003) (“In determining whether a proffer of scientific evidence is sufficiently reliable, we have previously held that one very significant fact to be considered is whether the experts are proposing to testify about matters growing naturally and directly out of research they have conducted independent of the litigation, or whether they have developed their opinions expressly for purposes of testifying”). 22 Johnson II, 484 F. 3d at 427 (citing Johnson, 406 F. Supp. 2d 852, 858 (M.D. Tenn. 2005)). 23 Johnson II, 484 F. 3d at 435 (emphasis added). 24 Hayes, 2007 WL 2668589,  3. 20

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of Statler’s testimony, such as extensive familiarity with the particular product at issue.25 However, Statler only claimed to be an expert on “consumer product safety generally, manufacturer and seller responsibility, and the consideration of dangerous products by the [CPSC]” rather than an expert on riding lawnmowers.26 The court determined that this was not sufficient, and held that Statler lacked the objective proof necessary to give his expert-for-hire opinion credence.27 16.10.2.4 Nature of Testimony Proffered Questionable Courts also will analyze the actual testimony being offered when determining the admissibility of the plaintiff’s expert’s testimony, to see whether the opinion has veered improperly into bald legal conclusions and disparaging comments against the corporate defendant. Courts have rejected and should reject this type of testimony that provides no assistance to the trier of fact. Again, Hayes serves as a prime example of this type of situation. Plaintiff’s expert, Statler, attempted to testify that the accident at issue was caused by a “systemic disregard for safety, at all levels, on the part of [defendant]” and that defendant’s failure to install a rollover protection system “flew in the face of any viable product safety program,” “violated . . . responsible manufacturing practice . . . and amounted to reckless disregard for safety of its customers and gross negligence.”28 The court correctly pointed out that in addition to the expert’s other problems, this type of testimony was not admissible because it “deviates from opinions—which are certainly allowed from expert witnesses—to legal conclusion—which are reserved for the jury.”29 In addition to stating legal conclusions, Statler’s report went on to declare that “[h]ad the company eschewed subterfuge, and instead confronted legitimate risk concerns and engaged in what it knew to be responsible corporate conduct,” the accident could have been avoided.30 This the court excluded as “unduly inflammatory,” noting that his proposed report “reads less like an expert’s unbiased assessment and more like counsel’s closing argument.”31 In some respects, this part of Hayes may be most notable, in that the court put the brakes on plaintiff’s

25

Id. at  2 –3. Id. at  3. 27 Id.; see also Oakberg v. Zimmer, Inc., Civil Docket No. 03-47-BU-SHE, U.S. Dist. Ct., Dist. Mont., Butte Div., Nov. 23, 2004 Court Order, 4, 14(b) (excluding the testimony of former FDA medical officer, Suzanne Parisian, the court held: “Parisian may not offer opinions relating to . . . the application of FDA regulations to Defendant’s operations. . .”); Barnes v. EBI Medical Systems, Inc., et al., At Law No. 98–439, Spotsylvania County Circuit Court, Virginia, Jan. 26, 2001 Court Order (excluding the testimony of former FDA medical officer, Dr. Parisian, finding that “she is not qualified to render an opinion as to the adequacy of the warnings that accompanied the device at issue. . .”) (emphasis added). 28 Hayes, 2007 WL 2668589,  1– 2. 29 Id. at  3; see also Barnes, At Law No. 98– 439 (order excluding the testimony of former FDA medical officer, Dr. Suzanne Parisian, holding that “her testimony was inadmissible legal opinion. . .”). 30 Hayes, 2007 WL 2668589,  3. 31 Id. 26

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expert because of the outrageous nature of the opinion offered, when all too often, courts turn a blind eye to invective when clothed in the guise of expert testimony.

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ASSESSING DAMAGES AND PUNITIVE AWARDS

In most states, the question whether the claimant has suffered any damages, and if so, what they are, is a question for the fact-finder at trial, to be determined after the defendant has been found liable, according to general state law principles. In some jurisdictions, a trial will be separated or bifurcated into a liability phase and a damages phase, and accordingly, the parties may be able to put off discovery on the issue of damages until after liability has been determined. Generally, once a defendant is found liable, a claimant will be allowed to recover all actual damages that resulted because of the product’s defect and/or the defendant’s negligence, including all pecuniary losses, as well as compensation for physical and sometimes also emotional harm, and lost earnings. In addition, generally, a claimant will also be allowed to recover for all consequential damages, to the extent that they are reasonably foreseeable from the defect or negligence at issue. In many but not all states, punitive damages may be awarded in a product liability case (e.g., West Virginia, allowed; Washington, not allowed). Many states that allow the recovery of punitive damages impose a higher evidentiary standard of proof, that is, by a requirement that the elements be proven by clear and convincing evidence. A showing of exceptional or outrageous conduct, of oppression, fraud, malice, or gross negligence, is required (e.g., Alabama, Kansas, Kentucky, and New York). Some states limit the amount of any award of punitive damages: for example, in Alabama, punitive damages are capped at three times compensatory or $1.5 million. Other states, for example, Georgia, direct that part of any award of punitive damages go to the state. A recent series of decisions by the U.S. Supreme Court, culminating in its 2003 decision in State Farm Mutual Automobile Insurance Company v. Campbell, has clarified the limits on the availability and allowable amounts of punitive damages, given the Due Process Clause in the U.S. Constitution. In summary, all courts in the United States, both state and federal, must consider three factors. First, they must consider the reprehensibility of the defendant’s conduct, as directed to the plaintiff and not to others, and as performed within the jurisdiction and not without. Second, they must consider the ratio between the compensatory damage award and the proposed punitive damage award, as limited in all but egregious cases to no more than 9:1, and where the compensatory damage award was significant, to 1:1. And third, they must consider the civil and/or criminal sanctions, if any, that could be imposed for the defendant’s conduct, bearing in mind that punitive damages should not be used as a substitute for criminal sanctions, given that the latter is imposed only upon a higher standard of proof.

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16.12 PRODUCT LIABILITY CASE STUDIES FROM APPELLATE COURTS 16.12.1 16.12.1.1

Broussard v. Procter & Gamble Co Court

U.S. 5th Circuit Court of Appeals

16.12.1.2 Topic Consumer Products, Health Law, Injury and Tort Law, Manufacturing, Product Liability 16.12.1.3

Date

16.12.1.4

Case Number

02/13/08 07-30069

16.12.1.5 Summary In an action brought under the Louisiana Products Liability Act arising after plaintiff used, and was severely burned by, a Therma Care Heatwrap, summary judgment for Procter & Gamble defendants is affirmed where: (1) plaintiff failed to show that her use of the heatwrap was a reasonably anticipated use, particularly considering that she violated extensive warnings when she used the heatwrap; and (2) she failed to provide any evidence showing that defendant had reason to know that the warnings were ineffectual. 16.12.1.6 Background On February 27, 2004, Mrs. Broussard bought a Therma Care Heatwrap, an over-the-counter pain reliever, to alleviate muscle soreness in her lower back. The box of the Therma Care Heatwrap touted that the heatwrap could be “[u]se[d] anytime day or night, even while [the user is] sleeping.” Moreover, it claimed that the heatwrap was “[u]ltra thin, comfortable, discreet under clothing, [so that] no one knows [that the user is] wearing it.” Extensive warnings on the box, the individualized pouch, and the package insert however, qualified this promotional language. For example, both the box and the pouch warned that consumers should “[a]sk a doctor before use if [they] have diabetes, poor circulation, rheumatoid arthritis, or [if they] are pregnant.” In addition, the pouch warned consumers not to use the wrap “on areas of the body where heat cannot be felt,” and that “when using this product,” users should “[p]eriodically check [their] skin: (a) if [their] skin is sensitive to heat, (b) if [their] tolerance to heat has decreased over the years.” Finally, the package insert warned that consumers who “may be particularly sensitive to heat” should take various precautions, including “[p]eriodically check[ing] [their] skin while wearing Therma Care” and “[w]ear[ing] ThermaCare over a thin layer of clothing instead of directly against the skin.” Two days later, Mrs. Broussard used the Therma Care Heatwrap, strapping it around her lower back against her skin before falling asleep. When she awoke, Mrs. Broussard found that the Heatwrap had slipped to her buttocks and had caused severe burns on her left buttock.

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On February 16, 2005, the Broussards filed suit against Procter & Gamble, the manufacturer of Therma Care Heatwrap, pleading claims under the LPLA.2. The district court granted summary judgment to Procter & Gamble because Mrs. Broussard failed to show that her use of the Heatwrap was “reasonably anticipated,” and that the Heatwrap was “unreasonably dangerous.” The Broussards subsequently filed for appeal. 16.12.2

Robinson v. Brandtjen & Kluge

16.12.2.1

Court

U.S. 8th Circuit Court of Appeals

16.12.2.2

Topic

Injury and Tort Law, Product Liability

16.12.2.3

Date

09/11/07

16.12.2.4

Case Number

06-3668

16.12.2.5 Summary In action based on strict products liability and negligence, as well as a derivative claim based on loss of consortium and a claim for punitive damages, arising from a printing press accident, summary judgment in favor of defendant is affirmed where: (1) defendant had immunity from liability for product defects or failure to warn under S.D. Codified Laws section 20-910(3); (2) modification of the press was a superseding, intervening cause that shifted liability from defendant to plaintiff’s employer; (3) defendant had no duty to identify plaintiff as a party to be warned, and, alternatively, because defendant had provided adequate warnings to plaintiff’s employer; (4) the claims for loss of consortium and punitive damages depended on an underlying finding of strict liability or negligence. 16.12.2.6 Background Barbara Robinson (“Robinson”) worked at Clark Printing, Inc., a printing business in Spearfish, South Dakota. Clark Printing owned a printing press manufactured by Brandtjen & Kluge in 1939. While Robinson was operating the press in December 2001, her hand became lodged between the two large surfaces of the press, and she suffered severe injury to her hand. Robinson and her husband brought this diversity action against Brandtjen & Kluge, alleging negligence, strict liability, and loss of consortium under South Dakota law. The press was a Kluge 6 Roller Automatic Platen Printing Press, which Brandtjen & Kluge sold in 1940 to a newspaper in Deadwood, South Dakota. Clark Printing acquired the press over fifty years later, in 1991 or 1992. In 1996 or 1997, Clark Printing converted the press from a printing press to a foil stamping press. Robinson received only five to ten minutes’ training, and no safety instruction, before beginning to operate the press. Robinson testified that she was unaware of the risk of feeding the press by hand, and instead focused her efforts on printing the job properly. After about fifteen minutes of operating the press, Robinson’s

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hand became caught between the platen and the bed. Davidson quickly freed Robinson’s hand, but the hand was nonetheless severely injured. The Robinsons brought suit against Brandtjen & Kluge, alleging that the machine was defectively designed and that Brandtjen & Kluge failed to warn of the defects. The district court granted summary judgment for Brandtjen & Kluge on all claims. On the strict liability claim, the court concluded that Clark Printing modified the press by removing the automatic feeder, and that this modification was not reasonably foreseeable by Brandtjen & Kluge. On the negligence claim, the district court concluded as a matter of law that Clark Printing’s modification of the press was a superseding, intervening cause that shifted liability from Brandtjen & Kluge to Clark Printing. The court also held that Brandtjen & Kluge was not liable for a post-sale failure to warn, because Brandtjen & Kluge had no duty to identify Robinson as a party to be warned, and, alternatively, because Brandtjen & Kluge had provided adequate warnings to Clark Printing. We come to this case in 2007, but we must consider whether there is sufficient evidence to support a finding that the Brandtjen & Kluge press was defective when it was sold more than 65 years ago, in 1940. That court observed that it is inappropriate to superimpose contemporary standards of safety on an earlier era: “In short, a product can only be defective if it is imperfect when measured against a standard existing at the time of sale or against reasonable consumer expectations held at the time of sale.” We conclude as a matter of law that the lack of a detachable guard for use during manual feeding did not render the Brandtjen & Kluge press defective in 1940. Although a manufacturer has a duty to design a product that is reasonably safe for its foreseeable use, it is not required to design the “best possible product,” and “proof that technology existed, which it implemented could feasibly have avoided a dangerous condition, does not alone establish a defect.” For these reasons, we conclude that there is insufficient evidence to find that the press was defective in light of reasonable consumer expectations of the time. We also reject the Robinsons’ assertion that the failure to warn purchasers of the dangers of manually operating a press with an automatic feeder rendered the press defective. South Dakota law does not require a manufacturer to provide a warning when the product’s danger is open and obvious. We agree with the district court that Brandtjen & Kluge did not breach a post-sale duty to warn in this case. Brandtjen & Kluge had sold the press in 1940 to a newspaper in Deadwood, South Dakota, over 50 years before Clark Printing came into possession of the press. Given the passage of time, it would be unreasonable to require Brandtjen & Kluge to identify all owners of its platen presses. Liability for a post-sale failure to warn requires a finding “that product sellers can practically and efficiently discharge such an obligation and that the risks of harm are sufficiently great to justify what is typically a substantial post-sale undertaking.” Whatever the scope of the post-sale duty to warn, it does not extend to warning each individual employee of a company that owns a press some 61 years after the sale. Accordingly, the district court correctly dismissed this claim. For these reasons, the judgment of the district court is affirmed.

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16.12.3

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347

Calles v. Scripto-Tokai Corp

16.12.3.1

Court

Illinois Supreme Court

16.12.3.2

Topic

Consumer Products, Injury and Tort Law, Product Liability

16.12.3.3

Date

02/16/07

16.12.3.4

Case Number

101089

16.12.3.5 Summary In a strict liability and negligence suit arising from a deadly fire caused by a lighter designed and manufactured by defendant, summary judgment for the defendant is reversed where: (1) evidence that child-resistant designs were available and feasible and the trier of fact could have found liability under the “risk-utility” test; and (2) any open and obvious danger in connection with the product does not negate the defendants’ common law duty to exercise ordinary care. 16.12.3.6 Background On March 31, 1998, plaintiff Susan Calles resided with her four daughters, Amanda, age 11, Victoria, age 5, and Jenna and Jillian, age 3. At some point that night, Calles left her home with Victoria to get videos for Amanda. When she left, the twins were in bed and Amanda was watching television. Calles returned to find fire trucks and emergency vehicles around her home. It was subsequently determined by a fire investigator, Robert Finn, that Jenna had started a fire using an Aim N Flame utility lighter Calles had purchased approximately one week earlier. The Aim N Flame was ignited by pulling a trigger after an “ON/ OFF” switch was slid to the “on” position. As a result of the fire, Jillian suffered smoke inhalation. She was hospitalized and died on April 21. Calles filed suit in the circuit court of Cook County against Tokai, designer and manufacturer of the Aim N Flame, and Scripto-Tokai, distributor (collectively Scripto), alleging that the Aim N Flame was defectively designed and unreasonably dangerous because it did not contain a child-resistant safety device. According to the complaint, a safety device was available, inexpensive, and would have reduced the risk that children could ignite the lighter. Calles claims strict liability, negligence, and breach of the implied warranties of merchantability and fitness for a particular purpose. Calles further alleged that Scripto was negligent and strictly liable because of a failure to give adequate warnings. Scripto argued that: (1) the Aim N Flame was not defective or unreasonably dangerous because it worked as expected; (2) Scripto had no duty to make an adult product child resistant; (3) Scripto had no duty to warn because the dangers of the Aim N Flame were open and obvious; and (4) there was no breach of warranties because the Aim N Flame operated as intended and expected. The trial court granted summary judgment in favor of Scripto. On appeal, the appellate court affirmed in part and reversed in part. With respect to strict liability, the appellate court held that the Aim N Flame “does not qualify as the

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kind of especially simple device for which the result of the risk-utility balancing is too obvious for trial.” Accordingly, the appellate court reversed the trial court’s grant of summary judgment in favor of Scripto. The appellate court also reversed summary judgment on the negligent design claims and remanded for further proceedings. Under the consumer-expectation test, a plaintiff may prevail if he or she demonstrates that the product failed to perform as an ordinary consumer would expect when used in an intended or reasonably foreseeable manner. In the case at bar, there is a threshold question. Whose expectations control, that is, the adult purchaser or the child user? Calles argues we must apply the consumer-expectation test from the point of view of a child. We disagree. In light of these cases, we hold that the ordinary consumer of a lighter, such as the Aim N Flame here, is an adult—the typical user and purchaser. Therefore, the expectations regarding the Aim N Flame’s use and safety must be viewed from the point of view of the adult consumer. We now consider whether the Aim N Flame meets the consumer expectation test. The purpose of a lighter, such as the Aim N Flame, is to produce a flame. Clearly then, the ordinary consumer would expect that, when the trigger is pulled, a flame would be produced. Here, the Aim N Flame was not used in its intended manner, that is, by an adult. Thus, the question is whether it was used in a reasonably foreseeable manner. We find that it was. An ordinary consumer would expect that a child could obtain possession of the Aim N Flame and attempt to use it. Thus, a child is a reasonably foreseeable user. Likewise, an ordinary consumer would appreciate the consequences that would naturally flow when a child obtains possession of a lighter. Specifically, an ordinary consumer would expect that the Aim N Flame, in the hands of a child, could cause the result that occurred here—the starting of a fire that led to injury to a child. Under the facts of this case, the Aim N Flame performed as an ordinary consumer would expect—it produced a flame when used in a reasonably foreseeable manner, that is, by a child. This leads to the inescapable conclusion that the ordinary consumer’s expectations were fulfilled. In other words, the Aim N Flame did not fail to perform as an ordinary consumer would expect when used in a reasonably foreseeable manner. Thus, as a matter of law, no fact finder could conclude that the Aim N Flame was unreasonably dangerous under the consumer-expectation test. Therefore, Calles cannot prevail under this theory. This does not end our analysis however. Although the Aim N Flame satisfies the consumer-expectation test, it may, nonetheless, be deemed unreasonably dangerous under the risk-utility test. Under the risk-utility test, a plaintiff may prevail in a strict liability design-defect case if he or she demonstrates that the magnitude of the danger outweighs the utility of the product, as designed. Stated differently, “[t]he utility of the design must therefore be weighed against the risk of harm created” and “[i]f the likelihood and gravity of the harm outweigh the benefits and utilities of the product, the product is unreasonably dangerous.” Therefore, reasonable persons could differ as to whether the Aim N Flame is unreasonably dangerous, and we cannot say that Scripto was entitled to judgment as a matter of law. As such, we

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affirm the appellate court’s decision reversing the trial court’s decision granting summary judgment in favor of Scripto on the strict liability claims. The next question we must decide is whether Scripto was entitled to summary judgment on the negligent-product-design claims. The appellate court found that the trial court granted summary judgment in favor of Scripto on the basis of the simple-product exception. It then concluded that the risk-utility test was not applicable to negligent-product-design claims. Based on this holding, the appellate court reversed summary judgment and remanded for further proceedings. We find that the appellate court erred in doing so. The crucial question in a negligent-design case is whether the manufacturer exercised reasonable care in the design of the product. In determining whether the manufacturer’s conduct was reasonable, the question is “whether in the exercise of ordinary care the manufacturer should have foreseen that the design would be hazardous to someone.” To show that the manufacturer acted unreasonably based on the foreseeability of harm, the plaintiff must show the manufacturer knew or should have known of the risk posed by the product design at the time of manufacture. Scripto argues that if the Aim N Flame is not unreasonably dangerous for purposes of strict liability because of the open and obvious nature of the dangers associated with it, then the Aim N Flame is not unreasonably dangerous for purposes of negligent product design. We disagree with Scripto’s argument. The open and obvious nature of a danger is just one factor in evaluating whether a manufacturer acted reasonably in designing its product. After reviewing the evidence presented here, we find that conflicting evidentiary facts were presented with respect to whether the design of the Aim N Flame was defective. We further find that conflicting evidentiary facts were presented in connection with foreseeability, that is, Scripto’s knowledge of the potential risks posed by the Aim N Flame’s design. Accordingly, we conclude that questions of fact exist as to whether Scripto exercised reasonable care in the design and manufacture of the Aim N Flame, precluding summary judgment. For the reasons stated, we affirm the appellate court’s reversal of summary judgment in favor of Scripto on the negligent product design claims. Conclusion: We find there is no per se rule excepting application of the risk utility test where a product is deemed simple and its dangers are open and obvious. We also find that there are material questions of law and fact that preclude us from finding, as a matter of law, that the Aim N Flame was not unreasonably dangerous under the riskutility test. For the reasons set forth above, we affirm the appellate court’s reversal of summary judgment in favor of Scripto on the strict liability claims and on the negligent-product-design claims. Appellate court judgment affirmed. 16.12.4 16.12.4.1

Ford v. Polaris Indus Court

16.12.4.2 Topic Product Liability

California Appellate Districts Civil Procedure, Consumer Products, Injury and Tort Law,

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16.12.4.3

Date

16.12.4.4

Case Number

05/18/06 A106375

16.12.4.5 Summary Primary assumption of the risk did not bar plaintiffs’ strict products liability suit against manufacturer of a jet ski for defective design, and standard instructions on defective design were proper in case where plaintiff sustained severe orifice injuries, and whose internal organs were torn apart, after falling off a jet ski. 16.12.4.6 Background On September 9, 2001, the Fords and Nakamuras and various family members went to Lake Berryessa for a picnic. Laura took Susan for a ride on the watercraft. Susan was wearing a one-piece swimsuit and a life jacket. This was her first time riding a personal watercraft. Susan held onto Laura’s waist. After about five minutes, Laura stopped to tell Susan she was holding on too tight and to hold onto the grips behind her instead. Susan looked around; all she saw were the grab handles. She had to lean back and could only hook a couple fingers into each handle. They started out again in a straight line. The jet ski was “bumping up and down.” Susan lost her grip, was lifted off the seat and fell backward off the rear of the watercraft. As Susan hit the water she felt “a lot” of pain and vomited. Laura saw Susan floating in a pool of blood. Paramedics rushed Susan by helicopter to the University of California Davis Medical Center. Susan sustained a severe hernial and rectal injury. Her internal bleeding required multiple transfusions. Two surgeries were required to prepare and establish a colostomy. Medical records indicate she also required “massive resuscitation . . . from her initial operation.” Susan was in the hospital for 10 days, followed by a five-day post-operative stay at North Bay Medical Center. Susan has no control over her bowels. She was evaluated for rectal-colon reconstructive surgery, but the specialist concluded there was no possibility of reconstruction. When Susan learned this, she “basically fell apart.” Cause of the Accident The position of the jet increases the chance of highpressure exposure should a passenger be ejected to the rear of the watercraft. Susan landed less than a foot from the back of the jet nozzle. When there is a rearward ejection into the stream of water thrust by a jet nozzle such as occurred with Susan, the high pressure of the water penetrates the body, causing internal injuries. Design Defect—Plaintiffs’ Case There was a defect in the design of the SLH Polaris watercraft because this particular craft lacked adequate design safeguards to protect against a rearward ejection injury. In other words, there was no easily identifiable alternative means for the passenger to hold on when it was not feasible to hold onto the operator. Several feasible design features were available to Polaris to protect against rear ejections. A seatback is one alternative to prevent the passenger from “coming off” the back. For fifty cents at most, a simple seat strap that goes around

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the seat would provide a secure handhold for passenger stability. The manufacturer’s job is to identify and evaluate hazards and make decisions about remedies according to a safety hierarchy. The first tier on the hierarchy is to design out the hazard. Polaris’s solution to orifice injuries was to admonish participants to wear a wetsuit. The plaintiff’s expert testified, “Warnings alone were not an appropriate remedy. First, they are not comfortable when worn in warm weather conditions. Second, the likelihood that owner – operators would have wetsuits on hand for recreational passengers such as friends or family members is ‘going to be about nil.’ Third, the person at greatest risk—the passenger—is also the person least likely to have read the vehicle warning label.” Defendants’ Case Polaris’s forensic engineer concurred that it was likely Susan would not have been injured had she been holding onto a seat strap. He also stated that although orifice injuries are exceedingly rare, watercraft manufacturers cannot ignore them and have a responsibility to try to design features that would prevent or minimize the risk. Polaris had the employee most qualified to address safety features on the SLH. He testified that Polaris designed the SLH in-house. By the time of the 1996 model year, the label warned against orifice injuries. Polaris did not conduct tests to distinguish the risk of falling off the back of the craft as opposed to the side. He identified several design features intended to prevent the passenger from sliding off the back. Grab handles were an option to stay on board, but was not sure if Polaris ever provided seat straps for the two-person SLH. They were not offered as an optional feature because there was “no safety need” and “engineering got busy and was never able to get it done.” Procedural History In September 2002 the Fords filed suit, alleging causes of action for “products liability” against Polaris and negligence against Laura Nakamura. Polaris cross-complained against Laura for equitable indemnity. Laura moved for summary judgment asserting that the doctrine of primary assumption of risk barred the Fords’ action against her. Laura argued that she owed no duty to eliminate, or protect Susan against, “the risk of falling while the water craft was engaged in its maneuvers[,] as those maneuvers constitute a risk inherent in, if not the very purpose of, the sport itself.” The Fords did not oppose the motion, but Polaris did, arguing that Laura failed to communicate to Susan the instructions and warnings provided by the company, and wrongfully instructed her to ride the watercraft in an unsafe manner. Granting the motion and directing that judgment be entered in Laura’s favor, the trial court concluded that the activity that Laura and Susan were engaged in was subject to the doctrine of primary assumption of the risk: “[T]his . . . personal water craft operation was being done for enjoyment or thrill. It does require physical exertion as well as elements of skill, and involves a challenge containing a potential risk of injury. [}] And, in addition, even though there is no competition . . . or race going on with other operators of personal water craft, there was a kind of competition going on with the elements including waves [set up] by other boats and the testing of oneself against the challenges of speed and sudden turns. As to Polaris’s claims, the

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ENTERING INTO LITIGATION

court ruled that although Laura did not communicate to Susan the Polaris warning to wear protective clothing, and told her to hang onto the handles, contrary to Polaris instructions and warnings, these lapses at most amounted to mere negligence. Therefore under the doctrine of primary assumption of the risk, Laura owed Susan no duty of care. Polaris also moved for summary judgment, arguing that under principles of collateral estoppel, the court must apply primary assumption of the risk to the Fords’ claims against it. Denying the motion, the trial court explained that reliance on the ruling in favor of Laura was misplaced because the Fords’ allegations against Polaris concerned its duty to provide products free of design defects, a duty that did not attach to Laura. Moreover, while the court acknowledged that primary assumption of the risk may be applied to the activity of jet skiing, there was no finding that “rearward ejection jet thrust injuries” were inherent in the sport. At the close of evidence Polaris moved unsuccessfully for nonsuit, arguing that plaintiffs did not prove that Polaris increased the risks inherent in jet skiing. As well, Polaris proposed a special instruction to the effect that plaintiffs must prove “[t]hat the defects increased the risk of harm beyond those risks that are a normal part of the sport of jet skiing.” The court denied the instruction, ruling that if plaintiffs prove a defect, “that ipso facto raises the risk beyond those normally inherent in jet skiing and, therefore, requiring the jury to return a finding on that would not only be a redundancy but would be a confusing factor.” Polaris also proposed a special verdict that asked whether the design defect increased the risk of harm. The court rejected this verdict form. Additionally, Polaris sought to allocate fault to the Nakamuras pursuant to Civil Code section 1431.2, proposing a verdict form permitting such allocation. The court declined this request. The jury returned a special verdict against Polaris on the design defect claim, awarded Susan $382,024 in economic losses and $3,262,500 in noneconomic losses, and awarded Anthony $115,000 for loss of consortium. The jury also found that Susan was not comparatively negligent. The appeal followed. 16.12.4.7

Summary from the Superior Court of Napa County

The Trial Court correctly ruled that primary assumption of the risk did not foreclose the Fords’ strict products liability claim. The Trial Court did not err in refusing to deliver Polaris’s special instructions or granting nonsuit in its favor. The Trial Court did not err in precluding allocation of fault to Laura as operator/ coparticipant and to the Nakamuras as suppliers of the watercraft. Polaris cannot allocate fault to Laura as operator/coparticipant. The Nakamuras had no duty to call Susan’s attention to the manufacturer’s warnings. The judgment is affirmed.

Index

Accident Reporting and Investigation, 14 Active data, 239 Additionally Insured, 17 AIG Insurance, 215, 217 Alternative design, 42 American Standard, 160 –161 (The) American Tort Reform Association, 5 Anderson, Patricia, 28 ANSI Z535.1, 161, 172, 175 ANSI Z535.2, 167, 169 –170, 172 ANSI Z535.3, 172 ANSI Z535.4, 161 –165, 167 –172, 174, 177 ANSI Z535.5, 165, 172 ANSI Z535.6, 165, 172 –173, 175, 177 Appellate Procedure, 330 Aquafina, 204 Arbitral commission, 217 Article 41, 68 Article 42, 68 Article 46, 69 Article 49, 69 Article 64, 69 –70 Article 119, 68

Assessment of Mishap Risk, 144 Assumption of the Risk, 42 ATF, 267 Atlantic County, NJ, 7 Attorney –Client Privilege, 98 –99 Audits, 314 Australia, 50 Australian Law Reform Commission, 58 Backup data, 239 Berge, T., 267 Berkman, Eric, 26 Bifurcation, 45 Brandtjen & Kluge, 345–346 Breach of Contract, 99, 105, 114 Breach of Warranty, 99, 110 Brown, Chairman Ann, 22 Browne, Mark, 8 Burke, Jim, 266 Bush, President George, 8 Byrne, David, 282 California Code of Civil Procedure, 106 California Supreme Court, 40 Calles, Susan, 347

Lawsuit! Reducing the Risk of Product Liability for Manufacturers. By Randall L. Goodden Copyright # 2009 John Wiley & Sons, Inc.

353

354

INDEX

Campbell, Thomas, 8 Canada, 37, 59 Canada Consumer Product Safety Act, 66 Canada Safety Council, 67 Case, David E., 83 Cause-And-Effect Diagram, 142 Caution signal word, 162, 165, 168 Change request form, 132, 134 CE Mark, 283 Cheung, Karrie, 67 Chin, Justice Ming, 160 China, 67 –71, 82, 237, 261– 262, 305 China International Economic and Trade Arbitration Committee (CIETAC), 218 –219 China, Made In, 260 China recalls, 260 –261 China’s Civil Procedure Law, 218 China’s Supreme People’s Court, 218 Chinese Civil Procedure Law, 219 Chubb Insurance, 215 Cichowski, William, 30 Civil Code of Japan, 83 Civil Discovery Act, 106 Civil Procedure Law, 70, 75 Civil Procedure Rules, 57, 80 Clark County, NV, 6 Clarke, Mark, 287 Class actions, 43, 56–57, 62–63, 66, 72, 73 Class Action Fairness Act of 2005, 8 Clement, Health Minister Tony, 66 Clinton, Hillary, 7 Colahan, John D., 287 Comment ( j), 159 Commercial general liability insurance (CGL), 224 Comparative fault, 41 –42 Compensatory Damages, 99, 105, 108 Complaint, 94, 99, 106 –107, 228, 231, 249, 252, 268, 270, 272 –273, 281, 285, 289, 313, 327, 331, 347 Consequential Damages, 99 Consumer Contract Law, 84 Consumer Price Index (Canada), 65 Consumer Product Safety Association (Japan), 85 Consumer Product Safety Act, 267 –268, 270

Consumer Product Safety Commission (CPSC), 22, 125, 216, 219, 223, 260–263, 267–278 Consumer Products Safety Law (Japan), 85 Consumer Protection Act, 35, 77 Consumer Rights Protection Law, 68 –70 Consumer Service, 309, 313 Contingency fees, 66, 72, 74, 75, 100 Contracts/Agreements, 13, 247–248 Contributory negligence, 41– 42, 100 Cook County, IL, 6 Corporate Accountability International, 204 Corporate liability team, 245–246 Corrective Action, 302, 309–310, 313 CPSC Handbook for Manufacturing Safer Consumer Products, 307 CPSC Recall Process Checklist, 273 Customer Contract Review, 214 Dangerous documents, 131, 155 Danger signal word, 165, 168 Darrow, Clarence, 8 Data compilation, 240 Daubert, 45 –46, 100–102, 337–341 Daubert Decision, 100 Daubert Ruling, 337 DecisionQuest, 4 Defect and Noncompliance Notification, 280 Defects in warnings or instructions, 158 Defendant, 94, 97 –102, 104, 107–108, 113, 202–203, 218– 219, 236, 301, 327, 329–330, 337– 340, 342–345, 347, 351 Defense Strategies, 335, 337 Definitions of Probability, 146 De Novo Review, 330 Depositions, 102–103, 108–109, 333 DES, 40 Design, 19 Design Defects, 94, 96, 98, 103 Design review, 115–134, 305, 308– 309 Design Review Considerations, 121 Design Review Procedure, 127– 129, 132 Design Review Team, 116–117, 123, 127, 129, 132–134 Design Standards Review, 20 Detection, 141

INDEX

Development Risks Defense, 77, 79 Dilts, Robert, 140 –142, 145 Directive 84/450/EEC, 72 Directive 93/13/EEC, 72 Directive 98/27/EC, 72 Directive 2005/29/EC, 72 Directive on Liability for Defective Products, 287 Discovery, 47 –50, 57, 62 –64, 74 –75, 79, 89, 102–103, 108 –109, 113 –114, 131 –132, 233, 235– 242, 327, 331 –335, 337, 339, 341, 343 Discovery rule, 41 Dispute Resolution Rule, 186, 189 –190 Distribution, 312 Distribution Records, 273 Division of Recalls and Compliance, 269 Documents, 227 –230, 232 –242 Document Control, 13 DOT Auto Safety Hotline, 281 e-Discovery, 240 –241 Edwards, John, 7 Ehrlichman, John, 32 Electronic discovery, 108, 240 –242 End Effect, 139 Engineering Change Control, 132 Engineering Change Request, 132 –134, 227 –228, 235 EPA, 267 Europe, 71 –82 European Commission, 71, 74, 76 –78, 262, 283, 285 –287 European Commission’s Third Report, 77 –78 European Norm (EN), 283 EU Recall Planning Guide, 288 –289, 291, 293, 295 EU Standards, 284 Exceptional condition, 43 Expert Witness, 100 –101,103–104 Express Warranties, 179, 181, 183 –184, 202 Facilities, 304, 310 Fair Trading Acts (Australia), 51 Failure Cause, 139 Failure Effect, 139, 141 Failure Mode, 139 –142, 148

355

Failure Mode and Effects Analysis (FMEA), 136, 139–141, 309 Federal Circuit Court of Appeals, 38 Federal Court of Australia Act, 56 Federal Hazardous Substance Act, 24, 268 Federal Rules of Civil Procedure, 43, 45– 49, 102, 106, 240, 242 Federal Rules of Evidence, 46, 104 Federal Trade Commission, 181, 197 Federal Trade Commission Policy Statement on Deception, 205 Field Serviceability, 117, 121, 123 Final Design Review, 122, 128, 130 Fishbone diagram, 142 First party insurance, 224 Flammable Fabrics Act, 268 Food and Drugs Act, 66 Food and Drug Administration, 203, 216 Food and Consumer Safety Action Plan (Canada), 66 Foreign Tire Sales, 216 Foreseeable Use Analysis, 308–309 Freeman, Rod, 76 Frye test, 46, 105 Full Warranty, 190–191, 194–195 Gatekeepers, 101 General Principles of Civil Law, 68 General Product Safety Directive, 80, 281–283 General Warning Sign, 164–166, 174 Giuliani, Rudolph, 7 Goldberg, Defense Attorney Neil, 337 GPSD directive, 285, 287–288 Gromada, Veronica Hayes, 219 Handling and Storage, 311 Harmonization, 161 Harper, Prime Minister Stephen, 37, 66 Harris Poll, 5 Hayes, George, 340 Hazard Severity Panels, 164 Health Canada, 66 Hendrick, Andre, 216 Hodges, Dr. Christopher, 71 Identification of Hazards, 144 Implied Warranties, 181–184, 186–187, 190, 192, 199– 200

356

INDEX

Indemnification, 209, 211– 213, 215, 221 –222, 229 Indemnify, 106 Indenture Levels, 139 Industry Standards, 115, 117, 119, 123 Inspection and Testing, 310, 312 Insurance, 208 International Agency for Research on Cancer, 204 Interrogatories, 106, 109, 327, 331 –333 Introductory Design Review, 122, 128 –129 Irish Personal Injuries Assessment Board, 76 Ishikawa Diagram, 142 –143 Ishikawa, Kaoru, 142 ISO 3864–1, 163, 165 –166 ISO 3864–2, 162 –166, 168, 175 ISO 7010, 164, 166, 174 ISO 9000, 300, 311 Ivey, Ed, 32–34 Japanese Product Liability Law, 83 Judicial Hellholes, 5 Japan Judicial Support Center, 91 Johnson, Christopher Glade, 335 Johnson & Johnson, 266– 267 Johnson, William, 160 Jones, Michael G., 219 Judicial Panel for Multidistrict Litigation, 204 Kantei system (Japan), 89 Kaplan, Harvey L., 38 Kellam, Dr. Jocelyn, 50 Kuckelman, John F., 38 Kumho Tire, 100, 102 Lamm, Dr. Steven H., 100 Learned intermediary, 40, 60 –61 Learning Curve Brands, 216 Lee, Terence, 67 Legal, 252 Legal Cases, Baxter v. Ford Motor Co., 202 Best Buy v. Developers Diversified Realty, 241 Bredice v. Doctors Hosp. Inc, 336 Broussard v. Procter & Gamble Co., 344

Calles v. Scripto-Tokai Corp, 347 Columbia Pictures Industries v. Justin Bunnel, 241 Commission v. United Kingdom, 79 Daubert v. Merrell Dow Pharms, 46, 100–101 Ford v. Polaris Indus., 349 Frye v. United States, 46, 105 Guanghope v. Mirant, 217 Hayes v. MTD Products Inc, 339–340 Hickman v. Whirlpool Corp, 336 Johnson v. American Standard Inc, 161 Johnson v. Manitowoc Boom Trucks Inc, 339 Kumho Tire Company Ltd v. Carmichael, 102, 339 PSEG Power New York v. Alberici Constructors, 241 Qualcomm v. Broadcom, 242 State Farm Mutual Automobile Insurance Co. v. Campbell, 3, 49, 343 United Medical Supply v. United States, 240 United States v. Mirama Enterprises Inc, 270 Vorvis v. Insurance Corp of British Columbia, 65 Robinson v. Brandtjen & Kluge, 345 Wal-Mart v. RLI Insurance Co., 220 Williams v. Sprint, 241 Williams v. Taser International, 240 Zubulake v. USB Warburg LLC, 47 Legal Reform, 7 Limitation of liability, 180 Limited Warranty, 179, 187, 190, 192, 194–195 Litigation, 94 –95, 98, 103, 106, 109, 114, 131, 134, 185, 188–189, 204, 234, 240–242, 244– 245, 247, 252, 254, 321, 324, 327–328, 330, 332, 334, 336, 338– 342, 344, 346, 348, 350, 352 Local Effect, 139 Lohman, Kevin G., 339 Lott, Kelli Smith, 216 Loveday, Colin, 50 (The) Lovells Survey, 77 –78, 82

INDEX

Magnuson-Moss Warranty Act, 181, 184 –186, 197 Mandatory Settlement Conference, 335 Manning, Kathryn J., 59 Manufacturability, 115– 118, 121, 123, 136 Manufacturing Defect, 94 –96, 98, 106 –107, 115 –117, 133, 158 Manufacturing Engineering, 123 –124, 129 Marketing/Advertising Concerns, 13 Marketing defects, 201 Material/Component Concerns, 117, 119 Materials, 310 Mattel, 67 McKee, S. Gordon, 59 Measurement and Calibration, 312 Medical Device Directive (EU), 283 Menu Foods, 67 METI (Japan), 86 Metzger Law Group, 160 MIL-STD 882, 143, 145, 147 Ministry of Economy, Trade, and Industry (Japan), 86 Misrepresentation or Fraud, 107 Motion in Limine, 335 Murphy, Kevin, 8 Nakamura, Laura, 351 National Highway Traffic Safety Administration (NHTSA), 216, 263, 267, 278, 280– 281 National Vaccine Injury Compensation Program, 38 Negligence, 95–98, 100, 107, 110, 114, 116, 155, 158, 209 –211, 219, 221 –223, 232, 248, 287 –288, 323, 332, 339 –340 New York Convention, 217 Next Higher Level Effect, 139 Nixon, President, 32 Nonconforming Material, 312 Nord, Chairman Nancy, 22 Notice of Potential Liability Incident, 318– 319 Notice Signal Word, 167 –168 Obama, Barack, 7 Occurrence, 140 –142, 146 Office of Compliance, 273

357

Ogiwara, Yuji, 83 Outside Attorney, 247, 252 Panish, Brian, 26 –34 People v. Kelly, 105 PepsiCo Inc., Bottled Water Marketing, 204 Peremptory Challenges, 329 Pharmaceuticals and Medical Devices Agency Law, 84 Plaintiff, 94, 107 PL Expert, 319–324, 332–334 Poison Prevention Packaging Act, 268 Polaris, 349– 352 Post Production Design Review, 122– 123, 129, 130 Preemption, 42 Preliminary Design Review, 122–123, 128–129 Presumption, 159 Pretrial Defense Strategies, 335 Pretrial Stage, 335 Preventive Inoculation Law, 84 Process Engineering, 124 Product Design Reviews, 13, 250 Product Engineering, 123– 124 Production Processes, 311 Production Records, 273 (The) Product Liability Act (Thailand), 36 Product Liability Advisory Council Inc, 161 Product Liability definition, 93 Product Liability Directive, 77 –79, 287 Product Liability Prevention, 12, 149, 207, 243, 247–249, 317 Product Liability Prevention Plan, 253 Product Liability Trial Procedure, 329 Product Quality Law, 68–70 Product Registration Cards, 273 Product Recall Impact, 260 Product Reliability, 117– 118 Product Reliability Policy Statement, 125–126, 132 Product Reliability Testing, 250 Product Safety Policy, 125–126, 253– 254 Product Supplier Selection, 306 Product Safety & Reliability Review Board, 126–127 Product Safety Reviews, 13 Product Safety Team, 116–117, 128– 129

358

INDEX

Quality, 116– 117, 121 –124, 128 –129, 133, 136, 139, 151 –152, 157, 208, 214, 216, 219– 220, 228, 233, 236 –238, 243, 248– 250, 263 –265, 273, 288 –289, 297, 311 Quality Assurance, 249, 299, 300, 309, 311 Quality Control Records, 272 –273 Quality programs, 300 –304 Quality System, 248 Quality-of-Life Policy Council (Japan), 88 Quebec Civil Code, 62

Robinson, Attorney Jeff, 27 Robinson, Attorney Mark, 27 Robinson, Barbara, 345 Romney, Mitt, 7 Rule 4, 48 Rule 23, 43–44, 46 Rule 26, 47, 49 –50 Rule 30, 46, 102 Rule 34, 49 Rule 37, 47, 50 Rule 42, 45 Rule 53, 43 Rule 56, 45 Rule 702, 46 Rules of Civil Procedure, 99, 102, 106 Rungpry, Siraprapha, 35

Ramirez, Michael, 35 RAPEX, 81–82, 282, 283, 285 –286 Read and heed assumption, 159 Reasonable Alternative Design (RAD), 94, 96, 98, 160 Recall Coordinator, 258, 263, 271 –272 Recall Prevention, 297 Recall Procedures, 14, 264 –265, 272 Recalls, 19, 215, 219, 223 –224, 262 Records, 313 Records of Complaints, 273 Records Retention Programs, 13, 228 Records Retention Schedule, 228– 229 Refrigerator Safety Act, 268 Regulated Products Handbook Document 8001, 21 Regulation 2006/2004, 72 (The) Relevancy Prong, 101 Reliability, 101– 102, 115 (The) Reliability Prong, 101 Reliability Testing, 13 Repair, 311 Replicant data, 239 Representative Organization—Rio Grande Valley, 6 Request for Documents, 103, 108, 327, 333 Reliability Engineering, 123 –124 Residual data, 239 Restatement Third of Torts, 94, 95, 97 Review Teams Membership, 129 Risk Estimation, 169 Risk Priority Numbers, 141

Safe Harbor (Australia), 50 Safety Alert Symbol, 164– 167 Sales or Account Management, 123 Sanquin Foundation Case, 79 Scheindlin, Judge Shira, 47 Schilling v. Blout Inc, 97 Schwartz, Attorney Victor, 3, 4 Scripto, 347–349 Second Restatement of Torts, 159 Section 402, 94 Sedona Conference, 47 Self-Audit, 247–248 Self-Critical Analysis Privilege, 335– 337 Services Directive, 73 Several Rules of Evidence Concerning Civil Litigation, 70 Severity, 139, 142, 144–147 SG-Mark (Japan), 85, 87 –88 Shapiro, Richard, 26, 29, 34 Signal Word Selection, 169, 174 Sinrod, Eric J., 240 Skin Cancer Foundation, 203 South Florida, 6 Spagnoli, Christine, 26 –34 Speaker Pelosi, 22 Standards of Review, 330 State of the Art, 42, 61, 97, 98, 109, 115, 117, 119–120, 157, 237, 249–250, 284, 301–302 Statistical Methods, 312 Statistical Tables for the Federal Judiciary, 45

Protection of Lawful Commerce in Arms Act of 2005, 8 Puelz, Robert, 8 Punitive Damages, 108

INDEX

Statler, Stuart M., 339 –340 Statutes of limitation, 40 –41, 48, 64, 90, 109 –113 Statutes of Repose, 41, 109 Strict liability, 36, 38–39, 50–51, 57, 67– 69, 77 –78, 95 –96, 98, 107, 111, 114, 116 Sua Sponte (Japan), 89 Subrogation, 114 Suppliers and Subcontractors, 248, 251 Supplier Selection and Control, 14 Swedish Class Action Law, 73 Thailand, 35–37 Therma Care Heatwrap, 344– 345 Therrien, Emile, 67 Third Party Claim (Canada), 62 Third Restatement, 94 –98, 116 Third Restatement of Torts, 115, 135, 158 Thompson, Fred, 7 Tillinghast-Towers Perrin, 2 Toms, Douglas, 32 Tort, 114 Toys Directive (EU), 283 Trade Practices Act (Australia), 50, 51 (The) Trade Practices Amendment (Australia), 51 Tylenol Recall, 266

359

Underwriters Laboratories (UL), 153–154, 236–237 Uniform Commercial Code (UCC), 105, 181–183 U.S. Court of Federal Claims, 38 U.S. Food and Drug Administration (FDA), 43 U.S. Toy Recalls, 261–262 User/Operational Concerns, 117, 120 Voir Dire, 329 Wal-Mart, 219– 223 Warnings, 19, 135 Warnings and Instructions, 13, 157 Warning signal word, 165, 168 Warranties, 14, 179–200 Warranty Act, 181, 184, 186, 188, 190, 197 Warranty Statements, 251 West Virginia, 6 Work Environment, 311 (The) Workers’ Compensation Act, 16 Work Instructions, 310 Work Product Rule, 114 World Health Organization, 204 World Trade Organization, 67 Z4 Technologies v. Microsoft, 241