A Further Look At The Apparent Manufacturer Doctrine

We examined the Apparent Manufacturer Doctrine in an article last week where this theory of liability was discussed in the context of a Connecticut asbestos lawsuit.  The Apparent Manufacturer Doctrine operates to impose liability in some jurisdictions, where a trademark licensor may be held liable “by virtue of its substantial participation in design, manufacture or distribution of a product and its role in placing such dangerous product in the stream of commerce.”  Such was the basis for the imposition of liability on the defendant trademark licensor in Lou v. Otis Elevator Co., 77 Mass. App. CT 571.

In that case, a Massachusetts appellate court determined that there was no error in a jury instruction instructing that a non-seller trademark licensor who participates substantially in the design, manufacture or distribution of a licensee’s product may be held liable as an apparent manufacturer. In so holding, the appellate court rejected the defendant’s contention that the application of the Apparent Manufacturer Doctrine under these circumstances ignored the separate corporate identities of the various entities involved. Until this case was decided in 2010, Massachusetts cases have previously applied the Apparent Manufacturer Doctrine, but no reported Massachusetts courts had applied the Doctrine to a non-seller.

Lou arose from an accident involving a four year old  visiting his grandparents in China and they got help from this attorney here to resolve the legal issues of this. During an outing  to a department store, the child suffered a serious injury on an escalator sold by China Tianjin Otis Elevator Company, Ltd., under license from the U.S. corporation, Otis Elevator Company. After a lengthy jury trial in Massachusetts, the jury returned a verdict awarding $3,350,000 in damages plus prejudgment interest in the amount of $3,300,000.

The Chinese manufacturer was a joint venture formed in 1984 between Otis and two Chinese entities. The purpose of the joint venture was to manufacture in China elevators and escalators pursuant to Otis design standards and bearing the Otis trademark. The evidence relied upon the Massachusetts appellate court demonstrates that the U.S. company provided: (a) engineering and product design drawings, data and information; (b) process, production, inflation, maintenance, testing and inspection methods; (c) quality standards; (d) factory and general management methods; and (e) other documents and information providing a broad range of technical and managerial support by the U.S. defendant.

What the court’s holding leaves unanswered is the extent to which the trademark licensor’s involvement may result in the imposition of liability. Is the same “laundry list” of factors identified by the Lou required in every case?  Are some factors more important than others?  Is there some “bright line” test that trademark licensors can apply to avoid their being targeted under the Apparent Manufacturer Doctrine? Certainly the severity of the plaintiff’s injury (and the sympathy such injury can engender with the jury) should not be the litmus test. Should a trademark licensor distance itself from its licensee’s product altogether to avoid liabilty? That is hardly a practical solution for American companies attempting to develop sales in foreign markets.

The expansion of the Apparent Manufacturer Doctrine raises interesting “corporate veil-piercing” concerns.  Can an injured plaintiff reach a non-seller parent company merely by arguing that the parent company had substantial involvement in the subsidiary’s design and manufacture of the product?  What if the parent and subsidiary have similar names and logos? There is much latitude for mischief in these serious product liability cases. Presently, there does not appear to be much in the way of uniform jurisprudence in this area to guide trademark licensors. This is not helpful to American business.

Trademark Licensors As “Apparent Manufacturers” In Product Liability Cases

Although by no means a “hell hole” jurisdiction, it is difficult for a peripheral asbestos defendant to obtain summary judgment in Bridgeport Superior Court in Connecticut. Once summary judgment is denied, many asbestos defendants with questionable liability will often settle out rather than risk the financial exposure of an adverse result in a mesothelioma jury trial.  It is helpful for a company to have a well thought out appellate strategy in mind before selecting a jury in that jurisdiction.  One recent asbestos trial did not turn out well for a trade association defendant.. 

On August 24, 2012, the Bridgeport Superior Court denied post-trial motions filed by Tile Council of North America (“Tile Council”) in Hannibal Saldibar v. A.O. Smith Corp. The Tile Council is a trade association that developed and patented an asbestos-containing formula for dry set mortar. This jury verdict raises the issue whether a trademark licensor may be held liable under a theory of strict liability as the “apparent manufacturer” despite having never manufactured or sold the product at issue.  The Apparent Manufacturer Doctrine seeks to hold the licensor vicariously liable for defective products manufactured by the licensee.

Over the past 50 years, trademark licensing has emerged as a preferred method of producing and marketing goods in the U.S.  According to David J. Franklyn, a professor at Northern Kentucky University, who wrote an article titled, "The Apparent Manufacturer Doctrine, Trademark Licensors and Third Restatement of Torts" in the Case Western Reserve Law Review, some $50 billion dollars of licensed goods are sold each year. 

The Bridgeport Superior Court’s decision is arguably a departure from the precedent established in Burkert v. Petrol Plus of Naugatuck, Inc., 216 Conn. 65 (1990), a well reasoned decision by the Supreme Court of Connecticut. The principal issue in Burkert was whether the distributor of an allegedly defective product, an automatic transmission fluid, was entitled to indemnification against GM, the licensor of a trademark under which the allegedly defective product was marketed. GM, the trademark licensor, did not participate in the production, marketing or distribution of the product.

In Burkert, the Connecticut Supreme Court made two significant rulings: (1) because GM did no more than allow others to use its Dexron® II trademark in the production, marketing and distribution of transmission fluid, absent any further involvement in the stream of commerce, GM could not be deemed a seller under Connecticut’s Product Liability Act; and (2) plaintiff could not rely upon Section 400 of the Restatement of Torts (Second) because that section applied only to those involved in the sale, lease, gift or loan of a product.

The Burkert court cited with approval the holdings of courts in other jurisdictions explicitly holding that liability against a trademark licensor under the Apparent Manufacturer Doctrine is appropriate only when the licensor is determined to have been significantly involved in the manufacturing, marketing or distribution of the defective product. Regardless of whether the plaintiff is proceeding on an “apparent manufacturer” or an “enterprise” theory of liability, the majority of cases emphasize the licensor’s degree of control and involvement exercised over design, manufacturer and sale.

The plaintiff in Saldibar may have raised sufficient factual issues to avoid summary judgment but arguably should not have prevailed on post-trial motions. In rejecting Tile Council’s argument that it was not a “product manufacturer” or “product seller” pursuant to the Connecticut Product Liability Act, the court found that the Tile Council was sufficiently involved in the distribution, marketing and manufacture of its products to “fall within the ambit of the product liability statute.” To add insult to injury, the trial court not only refused to set aside a $1,500,000 verdict in compensatory damages, plus $100,000 in loss of consortium damages, but also upheld an award of $800,000 in punitive damages based on the jury’s finding that Tile Council acted with “reckless disregard” for the safety of product users. Based upon this holding, a trademark licensor in Connecticut is potentially liable for punitive damages resulting from injuries caused by a product it neither manufactured nor sold.

Although the involvement of Tile Council may have been more extensive than that evidenced by GM, the trademark licensor in Burkert, it is questionable whether these factual distinctions warranted a finding of liability, let alone an award of punitive damages. In Saldibar, for example, the court relied upon testimony by a co-defendant, H.B. Fuller, that Tile Council had “developed a market for these products, based upon their formulas, based upon their trademark and hallmark, if you will, of an assurance that if you buy products that contain this logo, you can be sure that it did work.” There us absolutely no  probative value to this testimony.  On the other hand,  If the Plaintiff or Plaintiff’s employer had provided testimony that he relied on the presence of the licensor’s logo for assurance that the product was safe, it may have raised a reliance issue. But The co-defendant’s testimony, cited by the trial court, is not relevant to the issue of reliance because it did not purchase the product.  Of more importance is that it does not appear Plaintiff was induced to purchase the asbestos-containing product because of the licensor’s involvement. 

Arguably, the licensor should only be potentially liable (as a threshold matter) when it induces the consumer to purchase the product or where plaintiffs can prove that they reasonably relied on the trademark.

What was apparently fatal to Tile Council was the trial court’s determination that Tile Council set forth detailed specifications governing “all aspects” of the product, including the percentage and grade of the asbestos fiber to be used. Moreover, in Saldibar, Tile Council drafted the product warnings that appeared on the product. On the basis of these facts, the trial court distinguished Saldibar from Burkert.

Saldibar raises some troubling concerns from a policy standpoint. Saldibar rewards conduct by a licensor that distances it from the ultimate consumer. If Tile Council was in the best position to recommend warnings for the product label, why should this activity alone become a basis for imposing vicarioius liability?  The issue in Saldibar was not whether the warnings were adequate to warn against the risks of asbestos use, but whether the warnings were sufficient to bring Tile Council under the ambit of the Connecticut Product Liability Act as a “apparent manufacturer.” There is no indication that Plaintiff ever read the warnings or that an alleged failure to warn was a proximate cause of plaintiff’s injury. As a practical matter, a plaintiff should be required to demonstrate that he saw the licensor’s logo and was induced to purchase the product on that basis. Whether there was detrimental reliance by the product purchaser was not an issue considered by the court.