Synch U.S. Playbook

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PRODUCT LIABILITY

A Practical Overview

Contributed by:

Spencer Raff of Pragmatica Law LLP

spencer@pragmaticalaw.com
pragmaticalaw.com

This article is not legal advice and is provided for general information purposes only.

What is Product Liability

About Product Liability

A product liability claim can come about whenever someone is hurt (or killed) by a product. It doesn’t matter if the injured person was the actual purchaser of the product, or using a product supplied by an employer, lent the product by a neighbor or friend, or was not using the product at all. For example, if the blade on an electric saw shatters and fragments injure not only the user, but also injures three nearby workers, all four (user and three bystanders) can have a product liability claim.

I can’t be sued, I’m in Scandinavia!

Is this really true? The short answer is “no.” U.S. courts will normally find they have jurisdiction over foreign manufacturers on product liability claims if the manufacturers either: (i) intended the products to be sold or resold into the U.S. or (ii) could reasonably foresee their products would make it to U.S. markets. While it may not be possible to sell products into the U.S. without some risk for product liability claims, there are practical steps to take for reducing such risks. This article examines some ways non-U.S. companies may currently engage with U.S. buyers.

Three Scenarios Examined

A tale of three scenarios

The made-up company WidgetMaker AB is headquartered in Stockholm, Sweden, and it makes Widgets—a hardware product. Widgets are being sold in Europe and now the CEO of WidgetMaker has decided to enter the U.S. market. She has three choices: sell directly to U.S. buyers, engage a U.S. distributor or create a U.S. entity to sell widgets in the US. Her main concern in selecting a market entry alternative is product liability litigation.

  1. Engaging a U.S. distributor

Engaging a distributor sounds good because the distributor is in the U.S. and will have to handle any headaches coming from anyone wanting to sue WidgetMaker. Unfortunately, distributors in the U.S. are like distributors anywhere else in the world; they want to make money and avoid risks. It would be an extraordinary distribution agreement that didn’t have the manufacturer (WidgetMaker) indemnifying the distributor for third-party claims, especially product liability claims. Usually, the language of the distribution contract states the manufacturer not only indemnifies the distributor for any personal injury or death caused by the product but such claims are typically an exception to any agreed limits on liability. This means there is no limit to the costs of indemnifying the distributor and paying any third parties who have been awarded damages by a court or through a negotiated settlement. There may be good business reasons for hiring a U.S. distributor, but avoiding product liability claims is not a valid one.

  1. Selling directly from WidgetMaker to U.S. buyers

What happens if WidgetMaker markets and sells directly to U.S. buyers? U.S. product liability law is based on a social policy of spreading the risk of harm for defective products to everyone in the chain of distribution and making each strictly liable for any harm. Before modern product liability laws, there were cases of persons harmed that had no remedy because they weren’t in direct contract with the responsible party, or the responsible party was no longer in business. The logic behind the modern law is that each “link” in the chain of distribution can add a small incremental cost to sales or services to cover the risk. The risk is shifted away from an individual, who otherwise may have to bear all the costs or harm alone, to entities better able to manage such risks.

Product liability law does not require negligence or “fault” by a party in order to have liability to the injured plaintiff. Everyone in the chain of distribution is “strictly liable” regardless of fault. That is why the U.S. distributor is including indemnity provisions and exceptions to any limits of liability. It is also why the U.S. plaintiff can go to court and name WidgetMaker AB as a defendant in a product liability suit because WidgetMaker is in the chain of distribution.

In another article for legal geeks we can talk about how the U.S. lawsuit is served on WidgetMaker AB in Sweden, and how any award by the U.S. court can be taken to Europe to be certified and might be enforced on WidgetMaker AB in certain circumstances, but for our purposes it’s only important to know it’s possible. It’s certainly more complicated and expensive than suits within the U.S., and the US’ treaties with other countries will matter. There are defenses to product liability claims but selling direct to a U.S. buyer from outside the country will not create an impervious shield to product liability litigation.

A quick note on defenses. There are some, but again they are fact specific, and some may go towards avoiding liability and others towards reducing a damage claim. For example, when the injured person has removed or disabled all the safety features of a power hand saw and then injures himself using the saw in the unsafe condition and in an unsafe manner (e.g. a carpenter resting a piece of wood on his leg and then cutting both the wood and leg – unfortunately, a real case).

  1. Creating a U.S. entity

Will creating a U.S. entity, WidgetMaker Inc., be an impenetrable shield against product liability claims against WidgetMaker AB? No, but it will reduce certain risks and raise certain barriers assuming all sales in the U.S. are directly from WidgetMaker’s U.S. entity (“WidgetMakerUS”) to the U.S. buyer, and that WidgetMaker AB is not a party to the sales contract or active in the US. Again, without going into complicated detail, having a legal entity in the U.S. makes it harder in some circumstances to name the foreign entity in a lawsuit, or makes it nearly impossible to obtain records from the foreign company. However, given the public policy behind product liability law, and the fact that WidgetMaker AB is probably the designer and/or manufacturer of the Widgets, the plaintiff that wants to name the foreign parent company in a lawsuit won’t be barred just because WidgetMaker AB is not in the US.

That said, on the practical side, product liability claims are typically brought on a “contingent fee” basis. This means the attorney may advance the costs of the lawsuit and the client won’t have to pay any attorney’s fees unless there is a judgment or settlement (but will have to pay court costs and expenses, regardless). If there is a recovery, the attorney is paid a portion of the judgment or settlement after first recovering any monies advanced for the lawsuit. So why does it matter how the attorney is paid? The plaintiff and his attorney are seeking to recover a certain amount of money for the injury (e.g. medical expenses, lost wages, pain and suffering, etc.). Let’s say in the case where a Widget caused harm, the hoped for recovery is a million dollars. If WidgetMakerUS and any other U.S. defendant is likely to be able to pay that amount (directly or because of insurance), there is less reason to name WidgetMaker AB and bear the added costs and risks (e.g. international treaty limitations) of cross-border litigation and prosecuting an enforcement action in the Swedish courts.

While a U.S. legal entity does not guarantee liability protections for a foreign corporation, for many types of claims, liability does stop with the US entity. For example, a breach of contract claim would stop at the subsidiary level if the foreign corporation wasn’t a party to the contract.

Get insurance!

So, what is my best protection when it comes to product liability? Using a good corporate structure with a subsidiary helps, but the best protection is to speak with a reputable insurance broker and obtain good coverage through a product liability policy and umbrella policies, not just for product liability claims, but for all your business operations in the US. Product liability coverage is standard and widely available. The insurance will not only protect your company against a valid claim, but given the costs of defense, the policy will also minimize the costs of defending claims your company may regard as weak or frivolous. This is the way nearly all U.S. companies operate. As a practice note, if you have product liability insurance that is issued outside the US, check with your insurance company to make sure there is not a specific exclusion for U.S. sales or product claims as such exclusions are the general rule.

Or should I just stay home?

Whether or not to enter the U.S. market is a business decision. However, it is a very large market and U.S. companies are subject to the same product liability and other risks that your U.S. entity will be subject to. You are competing on a level field, or if your overhead for engineering, design, general administration and other expenses is lower in your home country, perhaps the field is tilted in your favor. The risks of litigation can be managed through insurance, proper legal structures, good product design and manufacturing practices, and appropriate warnings. It should also be noted that silly cases make better headlines. Later, when a court reduces an award (known as remittitur), or the case is reversed on appeal, that isn’t exciting and doesn’t make it to the nightly news, or top of the website or front page of the paper [See Liebeck v. McDonald’s Restaurants (1994) https://en.wikipedia.org/wiki/Liebeck_v._McDonald%27s_Restaurants]. Lawsuits may be more common in the U.S. than in Europe, but many suits are dismissed pre-trial or settled before going to trial and for amounts that make sense in the context of the claims.

Disclaimer

The U.S. legal system is very dependent on the facts of a case, and seemingly minor facts matter. For example, there may be different outcomes if a product liability claim was based on a manufacturing defect rather than a design defect or a failure to warn. The laws of the fifty states and federal law are similar but not identical and establishing a court’s jurisdiction (ability to hear the case) is also subject to complex rules. Product liability claims often involve multiple parties and claims and defenses will be different for each. Cross-border claims will be affected by treaties and the laws of each country. The safest course is to have your specific situation evaluated by an attorney.

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