1. BUSINESS TORTS and PRODUCT LIABILITY Chapter 7

2. Torts in the Business Setting There is no such thing as a “business tort” By definition, this means torts that concern businesses Often cases with businesses are settled out of court There are usually big awards, as plaintiffs view businesses as “deep pockets”

3. The Types and Costs of Business Torts Costs of Tort System –Average annual cost of $260 billion per year – 2/3 of that involves business –Businesses lobby for statutory limits on tort liability –Pain & suffering and punitive damages place a high “sticker price” on certain behavior Types of 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 Usually Particular to Businesses Fraud Interference With Contractual Relations Interference With Prospective Advantage Premises Liability Product Liability Consumer Products & Negligence Consumer Products & Strict Liability 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 Often added to a suit of breach of contract

6. Lightle v. Real Estate Commission Lightle, Alaska real estate agent, listed Leighs’ house for sale Williams offered to buy conditioned on obtaining mortgage Another realtor had a client, Seeley, interested in house Lightle said house was available: “the first offer was dead.” Seeley made an offer; Leighs accepted. Seeley cancelled her existing lease, switched utilities, prepared to move. Unknown to Seeley, Lightle wrote on her offer that it was a “back-up contract” if Williams couldn’t get financing. Seeley found out, rescinded offer, demanded deposit back. Seeley filed a claim against the Alaska Real Estate Commission’s surety fund. It compensates losses in real estate due to fraud.

7. Lightle v. Real Estate Commission Alaska Real Estate 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” Lightle made partial disclosure but failed to disclose facts that might have affected Seeley’s decision.

8. Interference With Contractual Relations and Interference With Prospective Advantage Interference with Contractual Relations –Breaking the contract benefits a 3rd party –1. Existence of a contractual relationship –2. 3rd party knows about the contract –3. 3rd party intentionally interferes with the contractual relationship –See Matrix Group Ltd. v. Rawlings Interference With Prospective Advantage –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 MDM Group v. CX Reinsurance Co.

9. Matrix Group Limited v. Rawlings Sporting Goods Company Matrix (FL company) makes sporting equipment bags. Rawlings (DE company) makes sporting equipment. In 1996, Rawlings contracted that Matrix had exclusive license to use Rawlings’ trademark to produce, market and sell equipment bags. Parties agreed not to compete against each other. In 2003 K2 acquired Rawlings as a subsidiary. K2 also acquired Worth, a competitor to Matrix in sports bag market. Soon after, Rawlings terminated the agreement with Matrix. Matrix sued Rawlings for breach of contract and K2 for interference with business relationship (the issue here).

10. Matrix Group Limited v. Rawlings Sporting Goods Company HELD: Affirmed K2 was aware of the Rawlings-Matrix contract. President of Rawlings had discussed with K2’s general counsel a letter from Matrix’s president, warning Rawlings that K2’s plan to consolidate with Worth would breach the Rawlings-Matrix contract. The jury could infer that K2 intended to breach the contract by its actions. Jury could award damages under both claims of breach of contract and tortious interference.

11. MDM Group Associates v. CX Reinsurance Company, Ltd. MDM is insurance broker – insures ski resorts against risk that # of ski days during ski season would fall below a certain minimum. CX and others agreed to write policies for them. MDM received a commission of 12.5%. Premiums grew to $3 million, but poor snow in 1999-2000 caused big losses. Ski resorts made insurance claims. CX resisted, negotiated, mediated, litigated: $23 million in payouts. CX stopped issuing policies, which it had a right to do. MDM sued CX for intentional interference with prospective business relations for not renewing policies with ski resorts resulting in MDM not receiving commissions. Contended CX handled the ski resort claims poorly. Jury awarded MDM $6.75 million in damages. CX appealed.

12. MDM Group Associates v. CX Reinsurance Company, Ltd. HELD: Reversed & remanded with judgment in favor of CX. There is no interference when the defendant (CX) decided not to renew policies. There is no interference when MDM and CX have a contract that is affected by CX’s decisions not to renew other contracts (with ski resorts) and cancellation of contracts with ski resorts means lack of commissions to MDM. MDM cannot maintain an action against CX for interference with any contract of which CX is a party.

13. Product Liability See “Is Japan Really Different?” –It is usually said that Japan has less litigation and fewer lawyers –Some analysts say fewer lawsuits make Japan more competitive –In fact, the U.S. and Japanese tort systems are similar (even if the rules are different) Liability of producers and sellers of goods re: defective products General term applied that deals primarily in tort law Involves some contract law Involves some statutory law

14. History of Consumer Products and Negligence In the 19th century courts, there was the privity of contract requirement--a contractual relationship between injured party and 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

15. MacPherson v. Buick Motor Company (1916 landmark case) 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 (no contract with him); trial court holds that privity is not required; MacPherson wins. NY Court 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. Eventually, all states adopt this rule.

16. After MacPherson: The New Standard: NEGLIGENCE Manufacturer must exercise reasonable care under the circumstances. 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.

17. Strict Liability Created Under Contract Law 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 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

18. Baxter v. Ford Motor Company (1932 case) Baxter buys 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 left eye. 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.

19. 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 carefulness, due care, reasonableness, etc.

20. Strict Liability in Tort Law--California Changes Law: Greenman 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. S. Ct. of Calif. affirms trial court decision in favor of Greenman and says that the producer is “strictly liable in tort.” By mid-1970s every state supreme court had adopted strict liability rule.

21. 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 has been the leading rule adopted by most states to define liability for product-related injury. ALI now offers a new standard for product defect cases in 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.

22. Parish 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, left 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 adequate. Look at reasonable instructions or warnings if foreseeable risks of using a product. Numerous warnings provided. 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.

23. Parish 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. Jumpking has 2 printed 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 found on trampoline, plus additional warning re: supervision and educational instruction. 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: 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.” Warning here were adequate.

24. Strict Liability and the Failure To Warn Standard (How far liability can go) Gun mfgr. liable for failure to warn of possible damage to users’ hearing from long-term exposure to gun fire. Diet-food producer is liable for failure to warn about using adult diet food as baby food. Commercial pizza dough roller machine mfgr. liable when worker sticks hands in machine to clean it when machine is on. Johnson & Johnson pays $8.85 million to a liver transplant patient. Years of drinking & taking Tylenol had destroyed his liver. Company knew drinking & taking regular doses of Tylenol could damage liver.

25. Strict Liability & Design Defects Worker receives $750,000. Co-worker removes metal plate & covers machine with cardboard (failing to put plate back). Worker falls into machine and loses his leg. It is a manufacturing design defect that machine can run when the metal plate is removed. Restaurant employee badly burned. He tries to retrieve an item that fell from his shirt pocket into French Fry machine. Child pushed emergency stop button on an escalator, causing person to fall, and be injured. It’s a design defect to make a button red--kiddies might like it and push it!

26. Force v. Ford Motor Company Force was driving a Ford – was hit head on by another vehicle. Was wearing his seatbelt and shoulder harness but sustained severe head injury. Sued Ford and Mazda for product defect, saying the shoulder harness was designed defectively. Jury held for defendants. Force appealed. At trial Force had proposed a jury instruction from Restatement (Second) Of Torts that a product is defective if it fails to perform as an ordinary consumer would expect it to – Consumer Expectation Test. Force also wanted an instruction that the risk of danger in design outweighs the design benefits – Risk-Utility Test. Ford and Mazda argued that consumer-expectation test cannot applied to design defects of complex products, among them seatbelts. Ford and Mazda said that ordinary consumer of a car “simply has ‘no idea’ how it should perform in all foreseeable situations....”

27. Force v. Ford Motor Company Court of Appeals: Said that with respect to seatbelts, the consumer-expectation standard can be used. The instruction including the consumer- expectation standard was necessary to resolve the issues before the court. Mr. Force was entitled to submit to the jury both the risk-utility test and the consumer- expectation test. HELD: Reversed and remanded for a new trial.

28. Strict Liability and Unknown Hazards or Latent Defects 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 cased by IUDs have been in the courts for years Manufacturers must have recalls or warnings when hazard is detected

29. Market Share Liability or Enterprise Liability Used when, because of latent effect, plaintiffs do not know the specific manufacturer Arose in response to DES drug suits May sue any or all of the manufacturers in question Manufacturers share liability according to their share of the market for the item

30. Joint and Several Liability Plaintiffs may sue any or all manufacturers to share the liability created Any of the defendant- manufacturers may be held responsible for all damages Some states have abolished it The tendency is to use “market share liability” (though that term is not always actually used by courts)

31. “European-American Product Liability: Same Law, Different Procedures” Product liability law for 25 members of European Union governed by Product Liability Directive adopted in 1985. Member states (most civil law nations) interpret Directive through their own codes – but moving to a more uniform standard. Directive adopted “liability without fault” for defective products -- much like strict liability in U.S. tort law. Plaintiff must show causal connection between the defect and damaged suffered – very much like Section 402A of Restatement (Second) of Torts. One big difference between U.S. and EU: Producer not liable in EU when “state of scientific knowledge” at the time of placing the product into circulation was not available to discover the existence of a defect. This eliminates unknown hazards, such as DES and asbestos. Europe also has procedural differences: no contingency fee cases, many more limits on discovery, a “loser pays” rule, no punitive damages and no juries.

32. Defenses To Negligence and Strict Liability 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 is one who “reasonably should know of the product’s dangers” e.g. another mgfr. –Ex: Air Force employees who handle certain chemicals – have a knowledgeable staff Some statutory limits exist

33. Ultrahazardous 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. –See Old Island Fumigation (in text)

34. Perspective On Tort U.S. Litigation Does a costly tort system make American firms less competitive than foreign forms? –Not likely - any company selling their products in the U.S. must meet same liability standard as U.S. companies. –High standards of products force improvement of standards worldwide. The “tort crisis” in the U.S. may have abated since Supreme Court has cracked down on massive punitive damage awards and doubtful expert testimony. State and federal laws are working to restrain certain suits or damages. HOWEVER, tort litigation involving companies will continue to be a “flashpoint” in the law – injured people seek relief from deep pockets and “heartless” companies. Firms subject to dubious suits devote significant resources to fending off the deep-pocket and frivolous litigators.