CPSC Regulatory Issues Often Impact Product Liability

Regulatory enforcement by the Consumer Products Safety Commission (“CPSC”) is on the upswing. As product liability litigation and regulatory activities often become entwined, it is all the more important to appreciate the interconnection between litigation and regulatory compliance.  In a personal injury action, defending a product that has been subjected to the harsh glare of regulatory scrutiny can be challenging.

Plaintiffs in product liability litigation will routinely seek evidence of any civil penalty investigation by CPSC, including any assessment of  penalties. If the CPSC has sent a letter to a manufacturer to advise that it has made a preliminary determination that the product contains a substantial product hazard, to what extent is this evidence admissible in a product liability suit against the manufacturer?

In a well-written article, Kenneth Ross explores the interplay between CPSC concerns and product liability litigation in “The Intersection of Product Liability and Regulatory Compliance,” an article that appeared in “Strictly Speaking,” the newsletter of DRI’s Product Liability Committee (Vol. 10, Issue 3, Nov 15, 2013).

Ross observes that correspondence in the manufacturer’s files between the CPSC and the manufacturer, which may contain reports made under Section 15 and Section 37, or discuss subsequent corrective action, is discoverable. Although CPSC’s employees are not permitted by CPSC rule  to testify in litigation about anything done or not done by the Agency in connection with a report and subsequent corrective action, former CPSC employees are frequently recruited to testify. Moreover, as Ross reminds us, there is certainly no prohibition on plaintiff’s expert being able to render an opinion concerning defect and causation, based in part on what is contained in CPSC’s files.

But if  plaintiff seeks to use CPSC’s actions to support their case, can a manufacturer use CPSC’s inaction to support its contention that the product did not violate CPSC’s rules and regulations? According to 15 U.S.C. ¶ 2074(b), the failure of the CPSC to take any action or commence a proceeding with respect to the safety of a consumer product is not inadmissible in evidence at a civil trial.

This rule is not always followed in practice. The Sixth Circuit recently admitted evidence of CPSC inaction, despite the regulation, as evidence that the manufacturer did not violate safety rules. See, Cummins v. BIC USA, Inc., — F.3d —, 2013 WL 4082013 (8/14/13).  In Cummins, the Sixth Circuit distinguished a situation where the CPSC had completely failed to take any action and the situation, such as in the case at bar, where the CPSC had engaged in substantial activity in regulating the BIC lighter at issue. 

Is evidence of a CPSC-mandated product recall admissible? Ross correctly observes that defending a product liability case involving a product that has been subject to a recall can be difficult, although hardly impossible. A plaintiff should be required to prove that his or her injury was caused by the bad aspect of the product that caused the recall before testimony concerning the recall is admitted. 

It is bad enough for a jury to hear during opening statements that the product at issue in the case was recalled.  At a minimum, a plaintiff should be required to demonstrate during argument on motions in limine that the alleged defect at issue in the recall was the defect alleged in the pleadings to be the proximate cause of plaintiff’s injury and is, in fact, the proximate cause of plaintiff’s injury.  To permit evidence of the recall otherwise potentially  taints the proceedings with unfair prejudice.  It may also be argued that evidence of the recall is barred as a “subsequent remedial measure” and therefore not admissible to prove a defect.

The Economic Loss Rule: An Under-Utilized But Not-So-Secret Weapon

In a decision issued on March 7, 2013, the Supreme Court of Florida reaffirmed Florida’s commitment to adherence to the economic loss rule in product liability litigation. In Tiara Condominium Association, Inc. v. Marsh & McLennan Companies, Inc. etc., et al., No. SC10-1022, the high court provides a helpful discussion of the origin and development of the economic loss rule. In summary, the economic loss rule is described as “the fundamental boundary between contract law, which is designed to enforce the expectancy interests of the parties, and tort law, which imposes a duty of reasonable care and thereby encourages citizens to avoid causing physical harm to others.” Thus, economic loss has been defined by Florida courts as “damage for inadequate value, costs of repair and replacement of the defective product, or consequent loss of profits – without any claim of personal injury or damage to other property.” In other words, economic losses are “disappointed economic expectations,” which are protected by contract law, rather than tort law.

Despite the rule’s underpinnings in the product liability context, the economic loss rule has also been applied to circumstances when the parties are in contractual privity and one party seeks to recover damages in tort for damages arising in contract.

In a product liability context, the economic loss rule was developed to protect manufacturers from liability for economic damage caused by a defective product beyond those damages provided by warranty law.  In discussing the development of economic loss rule principles, the Florida Supreme Court analyzed the California Supreme Court’s holding in Seely v. White Motor Co., 403 P.2d 145 (Cal. 1965). In Seely, the California Supreme Court held that the doctrine of strict liability in tort did not supplant causes of action for breach of express warranty.

In that case, the court was confronted with a situation in which plaintiff sought recovery for economic loss resulting from his purchase of a truck that failed to perform according to expectations. The court concluded that the strict liability doctrine was not intended to undermine the warranty provisions of sales or contract law, but was designed to govern the wholly separate and distinct problem of physical injuries caused by defective products. In East River Steamship Corp. v. Transamerica Delaval, Inc., 476 U.S. 858 (1986), the U.S. Supreme Court adopted the reasoning of Seely when it considered the issue of economic loss resulting from defective products in the context of admiralty.

According to the Supreme Court, when the damage is to the product itself, “the injury suffered – the failure of the product to function properly – is the essence of a warranty action, through which a contracting party can seek to recoup the benefit of its bargain.” Recognizing that the extending strict product liability law to cover economic damages would result in “contract law… drowning in a sea of tort,” the Supreme Court held that “the manufacturer in a commercial relationship has no duty either under a negligence or a strict products liability theory to prevent a product from injuring itself.” Thus, from the outset, the focus of the economic loss rule was directed to damages resulting from defects in the product itself.

In a  Client Alert, dated July 5, 2011, Stites & Harbison lawyers John L. Tate and Cassidy R. Rosenthal wrote about the Kentucky Supreme Court’s adoption of the economic loss rule in Giddings & Lewis, Inc. v. Industrial Risk Insurers (6/18/11). The Court unanimously held that “a manufacturer in a commercial relationship has no duty under a negligence or strict products liability theory to prevent a product from injuring itself.” The Court wrote: “We believe the parties’ allocation of risk by contract should control without disturbance by the courts via product liability theories.”

As discussed by Mr. Tate and Ms. Rosenthal, in Giddings & Lewis, the manufacturer sold a sophisticated machining center to an industrial concern. The parties set forth their mutual obligations in a detailed commercial contract. After seven years of continuous operation, and after the contract’s express warranty expired, the machining center malfunctioned in a spectacular fashion – throwing chunks of steel weighing thousands of pounds across the factory floor. The costs to repair the machining center and to get the business up and running again were almost $3 million. After reimbursing the machine’s owner for its losses, a consortium of insurance companies asserted a subrogation claim against the machining center’s manufacturer. With the warranty expired, the insurance companies sued in negligence, strict liability, negligent misrepresentation, and fraudulent misrepresentation. What could be more tortious conduct that this?  

Applying the economic loss doctrine, the Kentucky Supreme Court agreed with Mr. Tate holding that the purchaser could not recover from the manufacturer under any tort theory. The consortium was limited to contractual remedies, all of which expired years earlier.

Despite such groundbreaking decisions, is the economic loss rule  under-utilized in products liability and commercial litigation today?  Of course, if personal injury results from an alleged defect, the rule does not apply. However, not infrequently, complaints alleging damages arising from a defective product that purportedly caused economic loss sound in negligence or strict products liability. Are defense lawyers seeking dismissal of these tort claims on the basis of the economic loss rule as often as they should?.

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.

The Impact Of Twombly & Iqbal In Products Cases

The Toxic Tort Litigation Blog brings to the attention of defense practitioners weapons to add to their defense arsenal. An article in the Bloomberg BNA Toxics Law Reporter (6/14/02), titled "Making the Most of Twombly/Iqbal in Product Liabililty Cases", offers a valuable primer concerning how the pleading requirements under Rule 8(a) of the Federal Rules of Civil Procedure have been reinterpreted and reshaped by the U.S. Supreme Court in two landmark decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S 662,129 S. Ct. 1937 (2009).

In the article, Arnold & Porter’s Anand Agneshwar and Paige Sharpe review how these two decisions have been employed in product liability litigation either to win outright dismissals of complaints or to force plaintiffs to clearly state in their complaints – and not after discovery – precisely what they seek to prove. Motions brought under Twombly and Iqbal have come to be known as Twiqbal motions.

Prior to the Supreme Court’s publication of Twombly in 2007, federal trial courts were guided by the holding in Conley v. Gibson, a U.S. Supreme Court case decided in 1957. Pursuant to the holding of that case, “a complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.” As Mr. Agneshwar and Ms. Sharpe point out, Twombly retired the “no set of facts” language of Conley, and in its place issued a plausibility standard under which plaintiffs must provide “more than labels and conclusions, and a formulaic recitation of the elements of the cause of action will not do so.” Thus, in order to “nudge[] their claims across the line from conceivable to plausible,” plaintiffs must provide a complaint with “enough heft to show that the pleader is entitled to relief.”

The policy rationale for this holding is the avoidance of “potentially enormous expense of discovery in cases with no reasonably founded hope that the discovery process will reveal relevant evidence.” Twombly left unclear whether its pleading directives applied to all civil cases brought in federal court, or just antitrust cases. However, two years later, the Iqbal court made clear that the pleading requirements in Twombly were to be applied across-the-board.

How successful have Twiqbal motions been in product liability cases? A 2011 law review article by Professor William M. Janssen in the Louisiana Law Review, which focused on pharmaceutical and medical device litigation, found that some 21% of the 264 cases studied were dismissed on Iqbal grounds during the relevant time period. This statistic suggests that it would be imprudent to file a Twiqbal motion in every product liability case. Thankfully, Mr. Agneshwar and Ms. Sharpe provide a series of factors that should be considered prior to filing a Rule 8(a) motion.

As a general rule, defense counsel should carefully scrutinize their adversary’s pleadings in products cases to evaluate whether plaintiff has properly alleged facts to support an essential element of a claim, such as how a product is defectively designed (design defect claim) or how specifically defendants’ product labeling is insufficient (failure to warn claim). A complaint that contains only conclusory allegations is vulnerable to Twiqbal attack.