chapter 12 warranties, product liability, and consumer law

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

CHAPTER 12 WARRANTIES, PRODUCT LIABILITY, AND

CONSUMER LAW

LEARNING OBJECTIVES

What implied warranties arise under the UCC?

Can a manufacturer be held liable to any person who suffers an injury proximately caused by the manufacturer’s negligently made product?

LEARNING OBJECTIVES

What are the elements of a cause of action in strict product liability?

What defenses to liability can be raised in a product liability lawsuit?

When will advertising be deemed deceptive?

INTRODUCTION

A warranty is an assurance or guarantee by the seller or lessor of certain facts concerning the goods being sold or leased.

If seller breaches a warranty, buyer can recover damages, or rescind the contract.

WARRANTIES

Warranties automatically arise in most commercial sales transactions.

Normally warranties can be disclaimed or modified with specific language in the contract.

WARRANTIES

Warranties of Title. • UCC-312 can create three express

warranties at sale:•Good Title.•No Liens.•No Infringements.

WARRANTIES

Express Warranties.• Representations concerning quality,

condition, description, or performance potential of goods.

• Can be created by:• Any Affirmation or Promise.• Any Description.• Any Sample or Model.

WARRANTIES

Express Warranties.• Basis of the Bargain.

• Seller does not have to use the words “guarantee” or “warranty.”

• Buyer must rely on warranty when he enters into contract.

WARRANTIES

Express Warranties.• Statements of Opinion and Value. Only

statements of fact create express warranties.• Exception for Statements of Opinion by

Experts. • Puffery versus Express Warranties.

WARRANTIES

Implied Warranties.• Inferred at law based on the

circumstances or nature of the transaction.

WARRANTIES

Implied Warranty of Merchantability.• Merchantable Goods:

• Are average, fair, or medium-grade.• Are adequately packaged and labeled.• Conform to promises on label.• Have a consistent quality and quantity among the

commercial units. 11

WARRANTIES

Implied Warranty of Merchantability.• Merchantable Food: based on consumer

expectations.• CASE 12.1 Webster v. Blue Ship Tea Room,

Inc. (1964). Was the soup fit to eat on the basis of consumer expectations?

WARRANTIES

Implied Warranty of Fitness for a Particular Purpose.• Arises by any Seller who:

• Knows the particular purpose for which the goods are being bought; and

• Knows the buyer is relying on seller’s skill and judgment to select suitable goods.

WARRANTIES

Implied Warranty of Fitness for a Particular Purpose.• Particular vs. Ordinary Purpose: Differs

from ordinary purpose of merchantability. Goods can be merchantable but unfit for a particular purpose.

WARRANTIES

Implied Warranty of Fitness for a Particular Purpose.• Knowledge and Reliance Requirements:

seller must have reason to know purpose, and buyer must have relied on the recommendation.

WARRANTIES

Implied Warranty from Prior Dealings or Trade Custom.• Arises when both parties to a contract

have knowledge of a well-recognized trade custom. Courts infer that both meant this custom to apply to their transaction.

OVERLAPPING WARRANTIES

Occurs when two or more warranties are made in a single transaction:• When Warranties are Consistent: they

are construed as cumulative.

OVERLAPPING WARRANTIES

When Warranties are Inconsistent:• First: implied warrant of fitness for a

particular purpose.• Samples take precedence over

inconsistent descriptions.• Exact or technical specifications displace

inconsistent samples or descriptions.

WARRANTY DISCLAIMERS

Express Warranties can be disclaimed:• If they were never made (evidentiary

matter).• If a clear written disclaimer in contract

with specific, unambiguous language and called to Buyer’s attention (BOLD CAPS UNDERLINED).

Implied Warranties.• Unless circumstances indicate

otherwise, warranties of fitness and merchantability can be disclaimed with the words “As Is,” “With All Faults.”

Implied Warranties.• Disclaimer of the Implied Warranty of

Merchantability: must use the word merchantability.

• Disclaimer of the Implied Warranty of Fitness: must be in writing and conspicuous.

Buyer’s or Lessee’s Examination or Refusal to Inspect.• Warranties are disclaimed as to defects

that could reasonably be found on examination.

Warranty Disclaimers and Unconscionability.

MAGNUSON-MOSS WARRANTY ACT

Modifies UCC for consumer sales.• Only applies when written warranties

are made by Seller (including a service contract).

• If goods > $25 label must state either a “full” or “limited” warranty.

Full Warranty: Seller must repair or replace.

Limited Warranty must be conspicuous.• If limit of time only must say, e.g., “full

twelve-month warranty.”

UCC Implied Warranties: • May not be disclaimed, but can be

limited, but must correspond with time of express warranty.

• Requires document of all warranties in “readily understood language.”

LEMON LAWS

Apply to cars that are “lemons” and cannot be repaired properly.

Lemon Laws:• Provide remedies to consumers whose

automobiles under warranty fail to meet value or performance.

LEMON LAWS

Lemon Laws:• Seller has reasonable attempts to fix the

defect (usually 4). If not, buyer has remedy of a new car, replacement of defective parts, or return of all consideration paid.

Arbitration is usual process.27

PRODUCT LIABILITY

Product Liability is not a new tort.Liability can be based on:

• Negligence; • Misrepresentation; • Strict Liability; • Warranty Theory.

PRODUCT LIABILITY

Negligence. • Claim based on a manufacturer’s breach

of the reasonable standard of care.• Due Care Must Be Exercised in: design,

selection of materials, using appropriate production process, assembling and testing, adequate warnings, inspection, and testing.

PRODUCT LIABILITY

Negligence. • Privity of Contract Not Required. No

privity of contract required between Plaintiff and Manufacturer. Liability extends to any person’s injuries caused by a negligently made (defective) product.

PRODUCT LIABILITY

Misrepresentation. • Occurs when fraud committed against

consumer or user of product. Fraud must have been made knowingly or with reckless disregard for safety.

• Plaintiff does not have to show product was defective.

STRICT PRODUCT LIABILITY

Strict Liability holds people liable for results of their acts, regardless of their intentions or exercise of reasonable care.

Strict Liability and Public Policy. • Consumers should be protected from

unsafe products;• Manufacturers and distributors should

be liable to any user of the product;• Manufacturers, sellers and distributors

can bear the costs of injuries. 33

Requirements for Strict Liability:1. Product must be in defective condition

when sold.2. Defendant is in the business of selling

the product.3. Product must be unreasonably

dangerous. 34

Requirements for Strict Liability:4. Plaintiff must be physically harmed5. Defective condition must be proximate

cause of injury.6. Goods are in substantially same

condition.

Requirements for Strict Liability.• Proving a Defective Condition.

• Plaintiff does not need to show product or in what manner the product become defective.

• But plaintiff must show product was defective and “unreasonably dangerous” to the user.

Requirements for Strict Liability.• Unreasonably Dangerous Products.

• The product was dangerous beyond the expectation of the ordinary consumer.

• A less dangerous alternative was economically feasible for the manufacturer, but the manufacturer failed to produce it.

PRODUCT DEFECTS—RESTATEMENT (3RD) OF

TORTSThree types of product defects:

• Manufacturing Defects. • Design Defects. • Warning Defects.

TORTSManufacturing Defects.

• Occurs when a product “departs from its intended design even though all possible care was exercised in the preparation and marketing of the product.”

TORTSDesign Defects.

• Product is manufactured correctly, but defect is based on design.

• Test for Design Defects: plaintiff must show defendant’s failure to use a reasonable alternative design rendered the product not reasonably safe.

TORTSDesign Defects.

• Factors to be Considered.• Magnitude and probability of

foreseeable risks. • Relative advantages and disadvantages

of product.• Most courts use “risk-utility” analysis.

TORTSInadequate Warnings.

• Content: a product may be defective because of inadequate warnings or instructions.

• Liability based on foreseeability that proper instructions/labels would have made the product safe to use.

TORTSInadequate Warnings.

• CASE 12.2 Johnson v. Medtronic, Inc. (2012).

• Obvious Risks: no duty to warn.

Other Applications of Strict Liability.• Virtually all courts extend strict liability

to injured bystanders.• Strict liability also applies to suppliers of

component parts.

DEFENSES TO PRODUCT LIABILITY

Preemption.• Government regulations preempt claims

for product liability.Assumption of Risk.

• Some courts do not allow AR to be used in strict product liability claims.

Product Misuse. • Plaintiff does not know the product is

dangerous for a particular use.Comparative Negligence (Fault).

• Defendants may be able to limit damages by apportioning fault.

Commonly Known Dangers.Knowledgeable User.

CONSUMER LAW

Deceptive Advertising.• Occurs if a reasonable consumer would be

misled by the advertising claim.• Puffery: Vague generalities and obvious

exaggerations are permissible and not considered deceptive.

• Half-Truths: information is true, but incomplete. 49

CONSUMER LAW

Deceptive Advertising.• Bait and Switch Ads: the advertising of a

product at an attractively low price to lure customers in to buy more expensive items.

CONSUMER LAW

Deceptive Advertising.• Online Deceptive Ads: same rules apply.

To satisfy the “clear and conspicuous” requirement, disclosures must be close (only hyperlink if lengthy).• CASE 12.3 Hypertouch, Inc. v. ValueClick,

Inc. (2011). What makes an email deceptive?

CONSUMER LAW

Deceptive Advertising.• Federal Trade Commission (FTC) Actions.

The FTC can:• Issue cease and desist orders. With respect

to a particular product or advertisement.• With regard to multiple product orders. • Impose counter-advertising.

CONSUMER LAW

Telemarketing Sales Rule (TSR).• FTC’s TSR requires a telemarketer to

identify the seller, described the product being sold, and disclose all material facts related to the sale.

• Do Not Call registry.

CONSUMER LAW

Labeling and Packaging.• Labeling must be accurate, and must use

words that are easily understood by the ordinary consumer.

• Fuel Economy on Automobiles.• Food Labeling.• Menu Labeling Regulations.

CONSUMER LAW

Sales.• FTC and many states require that

consumers have a three business day “cooling-off” period during which they can cancel their purchase without obligation.

CONSUMER LAW

Protection of Health and Safety.• Food and Drugs.

• Pure Food and Drugs Act (1906), then Federal Food, Drug and Cosmetic Act (1938), enforced by Food and Drug Administration.

CONSUMER LAW

Protection of Health and Safety.• Consumer Product Safety.

• Consumer Product Safety Act (1972) regulates matters affecting consumer safety; established the Consumer Product Safety Commission.

CONSUMER LAW

Protection of Health and Safety.• Health Care Reforms.

• 2010, Congress passed the Patient Protection and Affordable Care Act.

• Expanded Coverage for Children and Seniors.

• Controlling Costs of Health Insurance.

CREDIT PROTECTION

Consumer Credit is protected by:• Truth in Lending Act.• Fair Credit Reporting Act.• Fair Debt Collection Practices Act.• Wage Garnishment.

CREDIT PROTECTION

Truth-in-Lending Act.• TILA is basically a disclosure law.

Requires all consumer lenders to compute the cost of a loan the same way and to advertise it as an Annual Percentage Rate (APR).

CREDIT PROTECTION

Truth-in-Lending Act.• Equal Credit Opportunity: requires that

credit be extended without regard to race, sex, color, national origin, age, or marital status.

CREDIT PROTECTION

Truth-in-Lending Act.• Credit Card Rules: limits consumer

liability to $50 for credit card debt in cases of stolen cards.

• Amendments to Credit-Card Rules (2010).

CREDIT PROTECTION

Fair Credit Reporting Act.• Limits the activities of credit reporting

agencies.• Consumers have the right to access

information contained about them in a credit reporting agency’s files and to require credit reporting agencies to delete unverifiable information.

CREDIT PROTECTION

FACT: combat identity theft.• Created the National Fraud Alert system

so that consumers can place fraud alert in their credit files.

• Requires credit companies to give customers free credit reports each year.

• Gives victims of identity theft some assistance.

CREDIT PROTECTION

Fair Debt-Collection Practices Act.• Requires collectors provide validation

notice to the debtor, at the time of first contact.

• Prohibits collection agencies from:• Contacting debtor at work. • Contacting third parties about payments.

CREDIT PROTECTION

Fair Debt-Collection Practices prohibits collection agencies from:• Using harassment or intimidation or

employing false misleading information.• Contact debtor after notice of payment

refusal.

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