Business Torts and Product Liability

1. Business Torts and Product Liability Chapter 7 Meiners, Ringleb & Edwards The Legal Environment of Business, 12th Edition

2. Tort Law and Business • There is no such thing as a “business tort”. • By definition, these are torts that concern businesses. • Often, potentially successful cases with businesses are settled out of court. • There are often big awards, as plaintiffs view businesses as “deep pockets”.

3. Types of Business Torts • Intentional • Negligence • Strict Liability • Torts are traditionally common law. • More and more statutes are playing an important role in this area of the law.

4. Torts Particular to Businesses • Fraud or Intentional Misrepresentation • Interference With Contractual Relations • Interference With Prospective Advantage • Product Liability • Consumer Products & Negligence • Strict Liability • Primary Areas of Product Liability Law • Ultrahazardous Activity

5. Fraud • Deliberate Deception • The tort may be called fraud, misrepresentation, fraudulent misrepresentation or deceit • Intentional Misrepresentation or Fraud • Relationship of parties is a factor in creating legal duties • (1) Representation has been made knowingly • (2) Without belief in its truth, OR • (3) Recklessly and careless whether it is true or false “Malice, intent, knowledge and other conditions of a person’s mind may be alleged generally” (Rule 9b, Federal Rules of Civil Procedure) • Claim often added to a suit for breach of contract • SeeLightle v. Real Estate Commission

6. Intentional Misrepresentation or Fraud • #1 Misstatement of an important or material fact • Misstatement induces another to enter into some sort of business relationship • Unrelated or unimportant misstatement cannot be a basis of fraud, i.e. hyping a product • #2 Scienter or intent to defraud • Intentionally misleading and deceiving another • #3 Person knows or has reason to knowthat statement being made is false • #4 Recipient of false information justifiably relies on the information and makes a decision to enter into the deal • #5Privitybetween the parties – relationship exists • #6 Proximate Cause – logical link between reliance on misstatement & losses to the plaintiff • # 7 Damages

7. CaseLightle v. Real Estate Commission • Lightle, Alaska real estate agent, listed house for sale by Leighs. Williams made offer to buy, conditioned on obtaining mortgage (a usual condition). • Another realtor had a client, Seeley, who was interested in the house. Lightlesaid house was available. Seeley made an offer; Leighs accepted. Seeley cancelled her existing lease, switched utilities, prepared to move. • Unknown to Seeley, Lightle wrote on her offer it was a “back-up contract” if Williams couldn’t get financing. • Seeley found out, rescinded offer, demanded her deposit back. Seeley filed a claim against the Alaska Real Estate Commission’s surety fund (to compensate losses in real estate due to fraud). • Commission heard case. Held that Lightle committed fraudulent misrepresentation. Awarded Seeley damages. Suspended Lightle’s real estate license. • Lightle appealed. • HELD: Affirmed Commission’s ruling. • Lightle said that prior deal was “dead”; that Seeley offer had been accepted, and “the house is yours”. Lightlemade partial disclosure but failed to disclose facts that might have affected Seeley’s decision.

8. Interference with Contractual Relations • Known also as • Interference With Business Relations or • Interference With Contractual Relations • Breaking the contract benefits a 3rd party • Existence of a contractual relationship • 3rd party knows about the contract • 3rd party intentionally interferes with the contractual relationship • Absence of justification for the interference • Damages as a result of the interference • See Slater Numismatics v. Driving Force • See Exhibit 7.2

9. CaseSlater Numismatics v. Driving Force • Slater bought & sold rare and modern coins. • Worked with ICG to grade and ship coins to Cable Shopping Network – which advertised coins for sale. • ICG and Slater shared revenues form that work. • Cable was Slater’s most important client. • Taylor and Williams worked with ICG. They left the company and set up Driving Force which operated as ANACS in coin business • ANACS hired away most of ICG’s key employees. • Essentially drove ICG out of business. • Then knowing the terms of Slater’s deal with Cable, offered Cable a better deal and took the account away from Slater. • Slater sued for intentional interference with contractual relations. • Trial court granted summary judgment for Driving Force. • Slater appealed. (Continued)

10. CaseSlater Numismatics v. Driving Force • Intentional interference occurs by inducing or otherwise causing the third person not to perform the contract • Result is pecuniary loss from failure of 3rd person to perform the contract • A reasonable jury could conclude that ANACS purposefully depleted the ranks of ICG. It also significantly impaired ICG’s ability to fulfill Cable’s coin grading needs. • ANACS also used Slater’s confidential information and made a play for Cable’s business while undercutting ICG’s pricing. • HELD: Reversed and remanded. • This is “not just the nature of competition” • There is a triable claim for intentional interference with contractual relations in this case

11. Interference with Prospective Advantage • Known also as • Interference With Prospective Economic Advantage or • Interference With Prospective Contractual Relationship • One party makes it difficult/impossible for another party to continue in some/all business dealings • A business attempts to improve its place in the market by interfering with another’s business • Unreasonable, improper manner of interference • Predatory behavior, not “merely competitive” • See Gieseke v. IDCA • See Issue Spotter “Hiring Employees from Competitors”

12. CaseGieseke v. IDCA, Inc. • Brothers Michael (MH) and Arthur Hogenson (AH) owned Standard Water together. • Gieseke worked for them. • MH & DH got into a dispute; stopped working together. • MH kept Standard and fired Gieseke because he was friendly with AH • Gieseke & AH started Diversified Water (each owned ½). • MH bought AH’s half interest in Diversified Water and merged into a new company, IDCA. • Without Gieseke’s consent, MH changed all business correspondence for Diversified Water to another address. • Hauled away some physical equipment • Made it nearly impossible for Gieseke to continue operations • Gieseke sued MH and IDCA for interference with prospective advantage. • District Court awarded $220,000 to Gieseke. • IDCA and MH appealed. (Continued)

13. CaseGieseke v. IDCA, Inc. • Relations protected against intentional interference include • Any prospective contractual relations • If the potential contract would be of pecuniary value to plaintiff • Included in interferences • Obtaining employment or employees • Opportunity of selling or buying land, chattels or services, and • Any other relations leading to potentially profitable contracts • Interference with the exercise by a 3rd party of an option to renew or extend a contract included • Also included is interference with a continuing business or other customary relationship not amounting to a formal contract. • Not necessary that prospective relation be expected to be reduced to an actual formal, binding contract – just that there was interference with business or customary relationship. • HELD: Affirmed. Diversified Water had reasonable expectation of economicadvantage before IDCA interfered with that prospective advantage.

14. Product Liability • Liability of producers and sellers of goods re: defective products • On one hand, we want companies to have incentives to ensure their products are safe. • On the other hand, we do not want companies to pay for injuries consumers suffer while using products improperly. • General term applied that deals primarily in tort law • Involves some contract law • Involves some statutory law

15. Consumer Products and Negligence • In the 19th century courts, there was the privity of contract requirement – a contractual relationship with the manufacturer was needed • Burden on consumer • If there was no relationship, caveat emptor applied –”Let the buyer beware” • This changed with MacPherson v. Buick Motor Company

16. Negligence in Tort • Manufacturer must exercise reasonable care under the circumstances. • Failure to inspect or test materials used in the product • Were the dangers foreseeable? • Care must be taken to avoid misrepresentation. • Defects and dangers must be revealed. • Causal connection must be present between the product or the design defect and the injury. • By the 1960s, courts began to apply strict liability. • Producers are responsible for damages and punitive damages may be added. • This theory can be used in conjunction with and as a separate theory from strict liability in a lawsuit.

17. CaseMacPherson v. Buick Motor Company • Buick sells cars to dealers. • NY dealer sells car to MacPherson. • Wheels made by another company; wheel collapses, causing accident that results in injury. • MacPherson files a negligence suit; Buick says it has no privity with MacPherson; trial court holds that privity is not required; MacPherson wins. • NY Ct. of Appeals holds manufacturer has primary control over product design & safety. • Defects could have been discovered by reasonable inspection, which was omitted. • Buick is responsible for the finished product. • Judgment affirmed.

18. Strict Liability under Contract Law Implied Warranty • Implied Warranty of safety • Manufactured Products • Food Products • Implied Warranty of Merchantability • Under the UCC Implied Warranty For Fitness For A Particular Purpose • Implied AT LAW – whether the manufacturer wants the warranty for the product or not Express Warranty • Guarantee of safety or performance • By model • By statement • By contract • By advertising • Misrepresentation theory is used as well to create strict liability • Ex: Baxter v. Ford Motor Company

19. CaseBaxter v. Ford Motor Company • Baxter buys new Model A. • Printed material states “Triple Shatter-Proof Glass”--”will not fly or shatter under the hardest impact. . .it eliminates the danger of flying glass.” • Rock hits windshield – Baxter loses aneye. • Trial court did not allow advertising to be admitted into evidence; said there was no privity of contract. • Baxter appeals. • Held: Trial court erred in taking the case from the jury. • Representations of Ford were false and Baxter relied on them. • Ford failed to provide the safety glass as advertised. • Breach of express warranty. • Reversed and remanded to grant a new trial allowing advertisement to be admissible evidence.

20. Strict Liability In Tort • Manufacturers are strictly liable for defective products • The courts ask: • Was the product defective? • Did the defect create an unreasonably dangerous product or instrumentality? • Was the defect a proximate cause or substantial factor of the injury? • Did the injury cause damages? • Courts do not worry about due care, reasonableness, in production. The issue is if there was a defect as defined.

21. CaseGreenman v. Yuba Power • Wife buys husband power tool. • Two years later wood flies out of machine, striking Greenman’s head. • He alleges breaches of warranties and negligence. • However: S. Ct. of Calif. affirms trial court decision in favor of Greenman and says that the manufacturer is “strictly liable in tort.” • By mid-1970s every state supreme court had adopted strict liability rule.

22. Restatement (Third) of Torts on Products Liability • The American Law Institute’s (ALI) definition of strict liability in Section 402A of the Restatement (Second of Torts). • This was the leading rule adopted by most states to define liability for product-related injury. • ALI wrote a new standard for product defect cases in newer Restatement (Third) of Torts. • State supreme courts consider the new concepts of law and often gradually adopt it. • Key part to the Restatement (Third) of Torts define categories of defect in §2 regarding (a) product departing from intended design, (b) foreseeable risk of harm could be reduced or avoided by an alternative design and (c) harm could have been reduced by reasonable instructions or warnings. • Restatement Third speaks of “risk-utility balancing”. • Restatement Third encourages courts to move away from the a distinction between negligence and strict liability. • Product defect law deals with design defects and manufacturing defects.

23. Failure to Warn • Failure by manufacturer to warn of dangers in using a product • Includes a wide variety of circumstances • Failure to give information about specific dangers • Failure to issue added warnings about problems that become known after product has been in use • Failure to give special emphasis on biggest dangers

24. CaseParish v. ICON • Parish was jumping on a backyard trampoline made by Jumpking. • Surrounded by a safety net (fun ring) made by ICON • He did a back somersault, landed on his head, rendered a quadriplegic. • Sued ICON and Jumpking for failure to warn of dangers in using products. • District court granted summary judgment for manufacturers; Parish appealed. • HELD: Affirmed. Warnings were not inadequate. • Look at reasonable instructions or warnings if foreseeable risks of using a product. • Numerous warnings provided in this case. • 3 warnings placed permanently on pad of trampoline. • Included warnings not to land on head or neck; paralysis or death could result; reduce chance of landing on head or neck by not doing somersaults/flips; only 1 person on trampoline at a time; multiple jumpers increase chances of loss of control, collision, falling off; results can be broken head, neck, back or leg; not recommended for children under 6 years of age. (Continued)

25. CaseParish v. ICON • Had nationally recognized warning symbols on the product. • 1 warning on each of 8 legs of Jumpking trampoline – designed to assemble so that warnings face out, visible to user. Jumpkingmanufactures 2 printed non-pictorial warnings sewn onto the trampoline bed. • Warning placard for the owner to affix to the trampoline – both pictorial warning and language re: safe use of trampoline. Owner’s manual contains warnings. • Warnings exceed the warnings required by the American Society for Testing and Material (ASTM). • Warnings are also provided with fun ring, which has separate owner’s manual with added warnings. • Restatement says that users must pay some attention for their own safety. • Users and consumers are required to “bear appropriate responsibility for proper product use.” • “Prevents careless users and consumers from being subsidized by more careful users and consumers” – damages paid from law suits are built into higher product prices. • Warnings here were adequate.

26. CaseTimpte Industries, Inc. v. Gish • Gish, a long haul trucker, arrived at a plant to pick up load of fertilizer. • His truck was pulling a trailer made by Timpte Industries. • It is an open-top, twin hopper trailer, loaded from above by a downspout that pours fertilizer into the hopper. • Downspout wasn’t going into position; he climbed on top of trailer; walked out along the top rail that is about 5” wide so he could grab downspout and put it in position to pour in fertilizer. • Was on the rail; gust of wind blew; he fell & was severely injured. • Gish (& his workers compensation insurance carrier) sued for design defect. • Contended that trailer “shouldn’t have a ladder that allowed him to climb up to the rail” (top rail is too narrow to walk on safely). • Timpte argued: Danger of being on rail was “open and obvious.” • District court granted summary judgment for Timpte. • Appeals court reversed for Gish. Timpte appealed. (Continued)

27. CaseTimpte Industries, Inc. v. Gish • HELD: Reversed Court of Appeal’s judgment and reinstated trial court’s summary judgment in favor of Timpte. • No evidence that the design defects rendered the trailer unreasonably dangerous. • Gish’s expert witness proposed 3 design changes. (1) Remove top 2 rungs of ladder to make it impossible for person to climb atop trailer; (2) Provide adequate foothold and handhold at top of trailer; (3) If an adequate handhold cannot be provided, widen the side rail to at least 12 “ to provide adequate footing • Texas courts apply risk-utility analysis. • Basis of design defect claim is whether there is a reasonable alternative design (at a reasonable cost) that would reduce a foreseeable risk of harm. • Timpte always warned users to maintain 3-point contact with trailer (this can’t be done if a user standing on the top rail). • Gish did not adhere to warning. Loses lawsuit. • No evidence of design defects.

28. Unknown Hazards • Dangers not known at the time of the product’s manufacture • Hazard associated with the product is not learned for many years • See Issue Spotter: “A Way to Reduce the Damage?” • Consumer Expectation standard used by courts • What is the expectation of an ordinary customer regarding safety of a product? • Claims are often class action suits • Asbestos Industry – has paid billions of dollars to tens of thousands of plaintiffs in claims over a 30-year period • Injuries caused by IUDs have been in the courts for years • Manufacturers must have recalls or warnings when hazard is detected

29. Joint and Several Liability • Most states have held plaintiffs may sue any or all manufacturers to share the liability created. • Manufacturers are allowed to fight it out as to which should pay for amounts of damages. • Any of the defendant-manufacturers may be held responsible for all damages. • The result has been limits on application of joint & several liability in some areas (i.e. medical malpractice) in some states.

30. Defenses in Product Liability Suits • Product Misuse or Abuse • Assumption of Risk • Tobacco and alcohol use are controversial areas; so far courts haven’t applied the defense to users. • Sophisticated User Defense and Bulk Supplier Doctrine • Usually apply to business settings • Bulk supplier does not have to police details of what is done as product continues down the chain, as bulk products go to intermediary in bulk and on down. • Sophisticated user or Knowledgeable purchaser is one who “reasonably should know of the product’s dangers” e.g. another manufacturer. • Ex: Air Force employees who handle certain chemicals – have a knowledgeable staff. • Some statutory limits exist.

31. Ultrahazardous Activity • Abnormally Dangerous Activity • Common law rules developed about uncommon activities where utmost care is needed • i.e. use of explosives, transport of dangerous chemicals, crop dusting, etc. • Kansas Case: Groundwater contamination from oil refinery

32. Does Product Liability Need Reform? • Does a costly tort system make American firms less competitive than foreign forms? • Not likely, as any company selling their products in the U.S. must meet same liability standard as U.S. companies. • High standards of products marketed abroad force improvement of standards worldwide. • The “tort crisis” in the U.S.: • Has abated since Supreme Court has cracked down on massive punitive damage awards and doubtful expert testimony. • Tort reform legislation from Congress has made class actions suits more difficult. • State laws are working to cap liability for certain damages. • Tort payouts may have stabilized. • Between 2004 and 2006, growth seemed to have stopped. • HOWEVER, tort litigation involving companies will continue to be a “flashpoint” in the law – injured people seek relief from deep pockets and “heartless” companies. • On the other hand, firms subject to dubious suits are devoting resources to “fending off the deep-pocket and frivolous litigators.”