BUSINESS TORTS and PRODUCT LIABILITY

Chapter 9

Torts in the Business Setting

• There is no such thing as a “business tort”.

• This just means torts that concern businesses.

• Often cases with businesses are settled out of court.

• There are often big awards, as plaintiffs and juries view businesses as “deep pockets”.

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.

– See Exhibit 9.1

Torts Particular To Businesses

• Intentional Misrepresentation or Fraud

• Interference With Contractual Relations

• Interference With Prospective Advantage

• Product Liability• Consumer Products &

Negligence• Strict Liability in Tort• Primary Areas of Product

Liability Law

• Ultrahazardous Activity

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– “Malice, intent, knowledge and other conditions of a person’s

mind may be alleged generally” (Rule 9b, Federal Rules of Civil Procedure)

• Claim often added to a suit of breach of contract• See Lightle v. Real Estate Commission

Intentional Misrepresentation or Fraud

• #1 Misstatement of an important or material fact– Misstatement induces another to enter into some sort of business

relationship– Unrelated or unimportant misstatement cannot be a basis of fraud, i.e.

hyping a product• #2 Scienter or intent to defraud

– Intentionally misleading and deceiving another• #3 Person knows/has reason to know statement being made is false• #4 Recipient of false information justifiably relies on the information and

makes a decision to enter into the deal• #5 Privity between the parties – relationship exists• #6 Proximate Cause – logical link between reliance on misstatement &

losses to the plaintiff• # 7 Damages

Lightle v. Real Estate Commission

• Lightle, Alaska real estate agent, listed house for sale by Leighs.• Williams's made offer to buy conditioned on obtaining mortgage.• Another realtor had a client, Seeley – was interested in the house.• Lightle said house was available as “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 it was a “back-up contract” if

Williams's couldn’t get their financing.• Seeley found out, rescinded offer, demanded her deposit back.• Seeley filed a claim against the Alaska Real Estate Commission’s surety fund (to

compensate losses in real estate due to fraud).• 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.

Interference With Contractual Relationsand

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 ASC Construction Equipment USA v. City Commercial Real Estate

See Exhibit 9.2

• Interference With Prospective Economic 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

See Test Yourself, p. 346

See Issue Spotter “Hiring Employees from Competitors”

ASC Construction Equipment USA v. City Commercial Real Estate

• ASC hired City to serve as ASC’s exclusive real estate agent in Atlanta.• ASC wanted land for showrooms for Volvo. City found suitable land.• Received 5% commission for ASC’s purchases• At ASC’s request, City then called for construction proposals.• Invited developers to pitch construction alternatives• Each developer promised to pay City a commission if it got the job.• One developer, Seefried, did not have in-house construction services.• Seefried called upon Catamount Constructors to help with its bid.• Seefried & Catamount had no contract, but Seefried anticipated hiring

Catamount if it won the construction job. • ASC then decided to handle construction directly.• This meant City would get no commission for arranging construction.• ASC told Catamount not to proceed with City & hired Catamount to build one

of the showrooms. City got no commission. (Continued)

ASC Construction Equipment USA v. City Commercial Real Estate, cont.

• City sued ASC for tortious interference with business relations.• Awarded City $467,674 compensatory and $1.25 m. punitive damages• ASC appealed.• HELD: Affirmed in part; reversed in part and case remanded.• To recover under tortious interference, plaintiff must show defendant

– 1) acted improperly & without privilege,– 2) acted purposely with malice and intent to injure– 3) induced 3rd party not to enter into or continue relationship with plaintiff– 4) caused financial injury

• Element 1 requires proof that defendant was “stranger” to the relationship• Evidence presented no basis for jury to find ASC was a stranger to City’s business

relationship with Catamount.• Object of ASC’s interference (prospective commission agreement between City &

Catamount) was mechanism to effect verbal agreement between City & ASC regarding City’s compensation.

• No tortious interference; punitive award cannot stand.

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 agreed to write policies. MDM received a commission of 12.5%. Premiums grew to $3 m., but poor snow in 1999 meant many lost ski days.

• Ski resorts made insurance claims. CX resisted, negotiated, mediated, litigated with $23 million in claims 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.• HELD: Reversed & remanded with judgment in favor of CX.• 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 cancelling contracts with ski resorts means lack of commissions to MDM.

• MDM cannot maintain an action against CX for interference with any contract to which CX is a party.

Product Liability• Liability of producers and sellers of goods re:

defective products• We want companies to have incentives to

ensure their products are safe.• But, we do not want companies to pay for

injuries consumers suffer while using products improperly.

• General term applied that deals primarily in tort law

• Involves some contract law • Primarily now statutory law

“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 have similar results even if the rules are different.

History of Consumer Products and Negligence

• In the 19th century courts, there was the privity of contract requirement – a contractual relationship with 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

Negligence in Tort

• 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.• This theory can be used in conjunction with and as a

separate theory from strict liability in a lawsuit.

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; trial court holds that privity is not required; tort law applies; MacPherson wins.

• NY Ct. of Appeals holds manufacturer has primary control over product design & safety.

• Defects could have been discovered by reasonable inspection, which was omitted, so Buick negligent in tort.

• Buick is responsible for the finished product. • Judgment affirmed.

You Can’t Be Too Careful:Winning Warning Labels

• On the underside of a cereal bowl: Always use this product with adult supervision.

• On a washing machine: Do not put any person in this washer.

• On a baby stroller: Remove child before folding.

• On a cell phone: Don’t try to dry your phone in a microwave oven.

• On the Yellow Pages: Please do not use this directory while operating a moving vehicle.

• On a wart removal product instruction booklet: Do not use if you cannot see clearly to read the information in the information booklet.

• On a gas tank: Never use a lit match or open flame to check fuel level.

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 the manufacturer wants such a warranty for the product or not

• See Issue Spotter: “Understanding Product Problems”

• 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

– Ex: Baxter v. Ford Motor

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.

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.

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 manufacturer is “strictly liable in tort.”

• By mid-1970s every state supreme court had adopted strict liability in tort rule.

“I’m From the FBI: I Know the Law”

• FBI Special Agent Clymer jumped the curb with his pickup.

• Was found passed-out drunk (blood alcohol 0.306).

• He was in his truck, with an empty bottle of rum.

• The truck caught fire and police pulled him out.

• Claimed he stopped along the road to make a call, had the pickup in “Park”, then he “somehow lost consciousness” and truck “somehow produced heavy smoke that filled the passenger cab.”

• He sued Chevy and the Chevy dealer for selling him a defective vehicle.

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 is the leading rule adopted by most states to define liability for product-related injury.

• ALI wrote a new standard for product defect cases in newer 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• Product defect law deals with design defects and manufacturing defects• See Parish v. ICON – Issue: Failure to warn under the standards of Restatement (Third) of Torts

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 jump, landed on his head, left quadriplegic.• Sued ICON and Jumpking for failure to warn of dangers in

products.• District court granted summary judgment for manufacturers;

Parish appealed.• HELD: Affirmed. Warnings were not inadequate.• Look at reasonable instructions or warnings if foreseeable risks of

using a product. Numerous warnings were 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.

(Continued on next slide)

Parish v. ICON, cont.

• Had nationally recognized warning symbols on the product.• 1 warning on each of 8 legs of trampoline – designed to assemble so that

warnings face out, visible to user.• Jumpking manufactures 2 printed non-pictorial warnings sewn onto the

trampoline bed.• Warning placard for the owner to affix to the trampoline – both pictorial warning

and language about safe use of trampoline.• Owner’s manual contains warnings found on trampoline, plus additional

warning about 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 says 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” – damages paid from law suits are built into higher product prices.

• Warnings here were adequate.

Strict Liability and the Failure To Warn Standard

(Manufacturers wonder how far laws will go)

• Gun mfgr. is 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 maker liable when worker sticks hands in machine to clean it & machine is on.

• Johnson & Johnson pays $8.85 million to a liver transplant patient due to the fact years of alcohol consumption & taking Tylenol had destroyed his liver. Company knew drinking & taking regular doses of Tylenol could damage liver.

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!!!

Reason #4 Why West Virginia Is Considered a Litigation Hellhole?

West Virginia Supreme Court Justice Richard Neely, in his book: The Product Liability Mess, p. 4

“As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiffs, I shall continue to do so. Not only is my sleep enhanced when I give someone else’s money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me.”

Timpte Industries, Inc. v. Gish

• Gish, a long haul trucker, arrived at a plant to pick up load of fertilizer. • His truck was pulling a trailer made by Timpte Industries.• An open-top, twin hopper trailer, loaded from above by a downspout that

pours fertilizer into the hopper.• Downspout wasn’t going into position; Gish climbed on top of trailer; walked

out along the top rail that is about 5” wide so he could put downspout in position to pour in fertilizer.

• While on top, gust of wind blew. He fell & was severely injured.• Gish (& his workers’ compensation insurance carrier) sued for design defect.• Contended that trailer shouldn’t have a ladder that allowed him to climb up to

the rail (top rail is too narrow to walk on safely).• Timpte argued: Danger of being on rail was “open and obvious.”• District court granted summary judgment for Timpte.• Appeals court reversed. Timpte appealed. (Continued)

Timpte Industries, Inc. v. Gish

• HELD: Reversed; reinstated trial court’s judgment for Timpte.• No evidence that the design defects rendered the trailer unreasonably

dangerous.• Gish’s expert witness proposed 3 design changes.

– 1) Remove top 2 rungs of ladder to make it impossible for person to climb atop trailer;

– 2) Provide adequate foothold and handhold at top of trailer;– 3) If an adequate handhold cannot be provided, widen the side rail to at least

12 “ to provide adequate footing

• Texas courts apply risk-utility analysis. – Basis of design defect claim is if there is a reasonable alternative design (at a

reasonable cost) that would reduce a foreseeable risk of harm.

• Timpte always warned users to maintain 3-point contact with trailer (this can’t be done if a user standing on the top rail).

• Gish did not adhere to warning. Loses lawsuit.

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 caused by IUDs have been in the courts for years

• Manufacturers must have recalls or warnings when hazard is detected

Joint and Several Liability

• Courts have held plaintiffs may sue any or all manufacturers to share the liability created.

• Manufacturers are allowed to fight it out as to which should pay for damages.

• Any of the defendant-manufacturers may be held responsible for all damages

• The result has been limits on application of joint & several liability in some areas (i.e. medical products) in some states

“Busted!”

• Michigan judge Robert Colombo quashed thousands of apparently bogus lawsuits for asbestos-related injuries.

• Principal examining doctor, Michael Kelly, had diagnosed injuries on 7,323 patients’ x-rays over 15 years (for $500 each).

• His detection rate of abnormalities was 58 times the detection rate by independent radiologists.

• Judge found that Kelly was neither radiologist nor pulmonologist.

• Had failed the certification test for reading x-rays.

• The day Judge Colombo commenced the investigation of the x-ray evidence, plaintiffs’ attorneys withdrew all lawsuits except one.

Asbestos Litigation in the United States and United Kingdom

• Asbestos is carcinogen that causes lung diseases.• Damages of asbestos were known decades ago; little was done about it.• By mid-1970s, litigation exploded.• More than 850,000 claims had sued – 8,400+ defendants (sellers, (manufacturers,

distributors & installers of asbestos-containing products).• Has resulted in bankruptcy and reorganizations of many defendants.• In U.S. asbestos litigation: “the longest running mass tort in U.S. history”.• Leading 1973 case was Borel v. Fibreboard Paper Products• By 2005 RAND study estimated $70 billion spent on compensation & litigation

costs through 2002 alone & reasonable estimates range from $200 to $265 billion.• Cape Industries plc (UK-based company) was sued and default judgment entered

but had no assets in the U.S.• Plaintiffs took their judgment to the UK courts for enforcement.• UK law didn’t recognize Borel theory & court refused to enforce U.S. judgment.

Plaintiffs would have to sue Cape under UK law.• In UK, “loser pays” rule in lawsuits. UK court held even though Cape created

multinational corporate structure to specifically ensure no recovery by U.S. plaintiffs, UK courts would not disregard the legal structure to enforce judgment against the parent company.

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 manufacturer.

– Ex: Air Force employees who handle certain chemicals – have a knowledgeable staff.

• Some statutory limits exist.

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)

See Test Yourself, p. 204

Perspective On Tort U.S. Litigation

• Does a costly tort system make American firms less competitive than foreign forms?– Not likely, as any company selling their products in the U.S.

must meet same liability standard as U.S. companies.– High standards of products marketed abroad force improvement

of standards worldwide.• The “tort crisis” in the U.S.:

– abated since Supreme Court has cracked down on massive punitive damage awards and doubtful expert testimony.

• Congress has made class actions suits more difficult.• State laws are working to cap liability for certain damages.• Tort payouts may have stabilized.

– After 2004, growth seemed to have stopped.• 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 are devote resources to fending off the deep-pocket and frivolous litigators.