2. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning Chapter 11 Product Advertising and Liability Its Legal, Ethical, and Global Environment MARIANNE M. JENNINGS 7 th Ed.

3. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 2 Development of Product Liability Initially No Liability for the Seller. –Courts followed a theory of Caveat Emptor (‘Let the buyer beware’). Caveat Emptor Removed in Section 402A of the Restatement of Torts. –Law has swung from no liability to almost per se liability.

4. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 3 Express Warranties. –Creation: Affirmation of fact or promise of performance (samples, model, descriptions). –Restriction: Must be part of the basis of the bargain. –Disclaimer: Cannot make a disclaimer inconsistent with an express warranty. Contract Basis for Product Liability

5. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 4 Case 11.1 Castro v. QVC Network, Inc. (1998). –Was the pan represented as suitable for roasting a 25 lb. Turkey? –What is the relationship between tort liability and warranty liability? –Did the pan pass the risk/utility test? Contract Basis for Product Liability

6. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 5 Federal Regulations Federal Trade Commission Act Authorizes FTC as Enforcement Agency. –Passed in 1914. –Federal Trade Commission given broad authority. –Requires regulation of “unfair and deceptive trade practices”.

7. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 6 FTC broadened by Wheeler-Lea Act of 1938. –“Is public deceived?” standard. –Not limited to adverse impact on competition. FTC Improvements Act of 1980. –Put some restrictions on FTC regulation. Federal Regulations

8. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 7 Content control and accuracy. –“No aspirin,” “aspirin free,” all dairy products, and so on (like express warranties). Performance claims: advertiser must be able to prove claim. –Corrective advertising: FTC has required corrective advertising when unsubstantiated claims have been made. Federal Regulations

9. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 8 Case 11.2 Warner-Lambert Co. v. FTC (1977). –What proposals for corrective advertising are made in the order? –What modification in the order does the court make? Performance Claims

10. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 9 Celebrity endorsements: –Celebrity must have used the product. –If the celebrity has not used the product, the source of claims must be given. Bait and switch: Prohibits advertising cheaper product and then getting customers to buy the more expensive product Federal Regulations

11. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 10 Product comparisons. –FTC took a laissez-faire approach during the 1980s. –It encouraged comparisons. –Congress amended trademark law in 1989 to allow competitors to bring suit for deceptive statements about products in competitor’s ads. Federal Regulations

12. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 11 Case 11.3 Verizon Directories Corp. v. Yellow Book USA, Inc. (2004). –What is the Lanham Act? –Are YB USA’s ads ‘puffery’? –What must Verizon prove to recover damages? Product Comparisons

13. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 12 FTC remedies: Consent decree is a negotiated settlement. Ad Regulation by FDA. –FDA is regulating more as more prescription medications are directly advertised. State regulations: professional ads. Federal Regulations

14. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 13 Implied Warranty of Merchantability (§ 2-314). –Given in every sale of goods by a merchant. –Goods are fit for ordinary purposes. –Average quality with adequate packaging. Implied Warranties

15. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 14 Case 11.4 Mitchell v. T.G.I. Friday’s (2000). –What is the foreign-natural test? –What is the reasonable expectation test? –Which test is better? Merchantability

16. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 15 Implied Warranty of Fitness for a Particular Purpose (§ 2-315). –Requirements. Seller has particular skill or judgment. Buyer is relying on that skill or judgment. Seller knows or has reason to know of reliance. Seller makes recommendation to buyer. Implied Warranties

17. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 16 Eliminating Warranties by Disclaimers. –Can disclaims both implied warranties by using “with all faults,” “as they stand,” “as is”. –Can also disclaim by using the names of both warranties in clear language. Implied Warranties

18. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 17 Privity Standards (§ 2-318). –Privity at buyer level—three code alternatives. Alternative A—buyer, members of household, and guests. Alternative B—any natural person expected to use goods. Alternative C—extends to any person expected to use the goods. Implied Warranties

19. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 18 Strict Tort Liability (§ 402A): –Defendant had duty to manufacture a reasonably safe product/was in the business of selling or manufacturing product. –That duty was breached. –Breach of duty caused plaintiff’s injury (product reached plaintiff in same condition). –Foreseeable that defect would cause injury. –Plaintiff has property or physical damages. Strict Product Liability

20. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 19 Unreasonably Dangerous Defective Condition: –Design defect. –Improper warnings or insufficient instructions. –Negligent packaging, manufacturing, or handling. Strict Product Liability

21. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 20 Case 11.5 Greif v. Anheuser- Busch Companies, Inc. (2000). –Was the beer ‘defectively” designed? –Did the beer have appropriate labels? –Is beer inherently dangerous? Unreasonably Dangerous

22. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 21 Manufacturing, Handling, or Processing Error. –Product must be properly manufactured, handled and packaged to avoid liability. Reaching the Buyer in the Same Condition. –No substantial change in product design that caused malfunction or injury. –Product not tampered with during distribution. Strict Product Liability

23. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 22 Strict Liability Case 11.6 Austin v. Will-Burt Company (2004). –Did the bungee cord relieve Wil-Burt from liability? –Was attaching the mast to the van an unintended use? –Was their appropriate warning?

24. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 23 Requires for a “Seller”: –Need not be a merchant. –Need not be “in the business” of selling that product. –Example: peanuts sold at games by a baseball club. –In some cases recovery has been allowed against groups of sellers. Strict Product Liability

25. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 24 Product Liability Suits Based on Negligence. –Same elements as strict tort liability plus prior knowledge of defective condition. –Punitive damages if plaintiff can show manufacturer/seller knew of defect. Negligence

26. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 25 Does not require privity of contract. Was injury to that party foreseeable. Should anticipate household use, presence of children, and so on. Negligence: Privity

27. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 26 Misuse or abnormal use: Exceeding weight limitations, using around flames. Contributory negligence: complete defense that overlaps with misuse. Comparative Negligence: reduces the amount of recovery. Assumption of risk: Plaintiff aware of danger, but does it anyway. Defenses

28. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 27 Case 11.7 Binakonsky v. Ford Motor Co. (1998). –What role does Binakonsky’s blood- alcohol level play in the case? –If Binakonsky would have died regardless of the design, should there be recovered under product liability? Assumption of Risk

29. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 28 Movement Toward Reform. –Verdicts and costs affect international competitiveness. –Congress has made efforts to make laws uniform. –Businesses need to focus on prevention. –Restatement (Third) of Torts. Product Liability Reform

30. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 29 Consumer Product Safety Commission. –Federal Penalties of $2,000 per Violation. –Up to $500,000 Maximum (willful violations carry $50,000 and/or 1 year). Uniform Product Liability Law. –The Department of Commerce has tried to get states to adopt uniform product liability laws. Federal Standards

31. Copyright ©2006 by West Legal Studies in Business A Division of Thomson Learning 30 EU Trying to Gain Uniformity –“State-of-the-Art” Defense: Product as good as it can be upon release. –International Standards Organization’s 9000 guidelines for quality assurance. International Issues