Protecting Yourself Against Product Liability

Andrew Branan, Esq.Wright Law Company, PA

Hillsborough, NC

Fundamental Formula

Higher Return = Higher Risk

(Higher in value chain = higher risk)

Anatomy of Liability

• A Dispute: What is each parties understanding of their transaction?

• Duty• Breach• Causation• Damages

Grounds for Liability

• Intentional acts• Negligent acts• Strict liability• Contract (usually implied)

Contract Indemnity Chain

Claimant

RetailerDistributorProcessorWholesalerProducer

– Insurance– Safety Audit/Premises Awareness/Regulations– Business Agreements (Contracts)– Business Entities

Layers of Risk Management

Insurance

• Farm Liability Policy – typically covers farm premises, activities incident to farming

• Commercial Business Policy – covers activities defined in the insurance contract (ie. Marketing processed products)

Insurance = Contract

• Does the policy treat the activity within the definition of “farming”?

• Is the activity excluded from coverage as a separate business distinct from the farming operation?

What your agent doesn’t know will hurt you

Questions to ask

An insurance policy is defined by its definitions and exclusions

Example

For the purposes of this policy, “farming” is described as:

The ownership, maintenance or use of the premises for the production of crops or the raising or care of livestock, including all necessary operations. “Farming” also includes operation of roadside stands kept mainly or the sale of the insured person’s farm products.

Foreseeable Risk: the Five D’s

• Death: parent, spouse, key manager, major investor• Disability: loss of labor/management, cost of long term

care• Disaster: loss of crop/buildings/equipment, unexpected

creditors• Divorce: loss of labor/management, division of assets• Disagreements: destroy business arrangement, damage

family

Farm Business Organizations – Choice of Entity

Farm Business Organization

• No cook book answer– “Which one is the best…”?

• Fact and human sensitive• Ultimate issue is tax and comfort level

Traditional Business Forms

1.Sole Proprietorship: A business owned by a single person or family, for which the owner reports business income and expenses on his or her personal income tax return and is legally responsible for all debts and obligations incurred by the business.

2.Partnership: An agreement by two or more persons to carry on, as co-owners, a business for profit.

Traditional Business Forms

3.Corporation: A legal entity formed in compliance with the statutory requirements of its state of incorporation, owned by the corporation, and managed by (i) a board of directors elected by the shareholders and (ii) officers employed by the board of directors.

4.LLC: Limited Liability Company5.LLP: Limited Liability Partnership

Major Issues in Choice of Entity

• Taxation issues• Which assets to put in• Handling multiple assets• Asset protection (risk management)• Complexity

Liability---can you gain paper protection from liability through an LLC, Corp?

Contract LiabilityTort Liability---negligence

General liabilityPremises liability

Intentional tort---assault, battery, slander, etc.Product liabilityRegulatory, health, environmental liabilityEmployer liabilityTax liability and moreAnimal IDDisease

Factors to Consider in Choice of Entity

Transferability – Can the owners freely sell or transfer their interests to a third party? Do you want it to be readily transferable? Outsiders, in laws, lack of value to outsiders?

Taxation – Is the business entity a flow-through entity for federal income taxation purposes – or does the entity pay taxes on the income?

Control – Are the entity’s business and affairs controlled by its owners – or by a central management that can act without the owner’s approval? Who should be in control?

Entity “Protection”

• You can make each type of business organization look like another other type.– Drafting is the key

• Follow filing/reporting/maintenance requirements

• Separate Check books and book keeping• Set up for “business purpose”

Business Agreements - ManagementBusiness Agreements - Management

• Appoint a manger or managers• Provide framework for decision authority and

resolution of disputes• Responsibilities and expectations clearly set out• Describe contributions and division of income

LLC Operating Agreement(for example)

• Operating agreement is analogous to corporation’s bylaws.

• Operating agreements may be oral and contain provisions relating to management, dividends, meetings, transfer of membership interests, and other significant issues.

• Generally, if the operating agreement is silent, courts will apply partnership principles.

LLC Management

• There are two options for management, generally set forth in the articles of organization:– Member-Managed: all of the members participate in

management, like a partnership.– Manager-Managed: members are elected to manage

the LLC. • If the articles are silent, statutes provide either

that each member has one vote or votes are made based on percentage of ownership.

• Note---drafting issue---pay the lawyer or yourself.

NEW Contact Information

Andrew Branan, AttorneyWright Law Company, PA110 W. Margaret Lane · P.O. Box 443Hillsborough, NC 27278 919 732 7539 · 919 619 8479 cellabranan@wright-law.net www.wright-law.net