by Karen Collins

16.4 Product Liability

Learning Objectives

1. Define product liability and discuss the three grounds, or “theories of recovery,” for a claim of product liability.
2. Discuss the three forms of manufacturer’s negligence that may be claimed in a product-liability case.
3. Define strict liability and explain the doctrine of strict liability in tort.
4. Define a warranty and distinguish between express warranties and implied warranties.
5. Identify the primary goal of tort law and distinguish between compensatory damages and punitive damages.

In addition to intentional and negligence torts, U.S. law recognizes a third category of torts: strict liability tortsTort resulting from actions that are inherently dangerous and for which a party may be liable no matter how carefully he or she performs them. involve actions that are inherently dangerous and for which a party may be liable no matter how carefully he or she (or it) performs them. To better appreciate the issues involved in cases of strict liability, let’s take up the story of your legal adventures in the world of business where we left off:

“Having escaped the house-painting business relatively unscathed, you head back home to rethink your options for gainful employment over your summer vacation. You’ve stored your only remaining capital assets—the two ladders and the platform that you’d used for scaffolding—in your father’s garage, where one afternoon, your uncle notices them. Examining one of the ladders, he asks you how much weight it’s designed to hold, and you tell him what the department manager at Ladders ’N’ Things told you—three hundred pounds per rung. He nods as if this is a good number, and, sensing that he might want to buy them, you hasten to add that though you got them at a cut-rate price because of a little rust, they’re virtually brand-new. As it turns out, he doesn’t want to buy them, but he does offer to pay you $35 an hour to take them to his house and help him put up new roofing. He’s easygoing, he’s family, and he probably won’t sue you for anything, so you jump at the opportunity. “Everything goes smoothly until day two, when you’re working on the scaffolding two stories off the ground. As you’re in the process of unwrapping a bundle of shingles, one of the ladders buckles, bringing down the platform and depositing you on your uncle’s stone patio with a cervical fracture.” Fortunately, there’s no damage to your spinal cord, but you’re in pain and you need surgery. Now it’s your turn to sue somebody. But whom? And for what? Pursuing a Claim of Product Liability It comes as no surprise when your lawyer advises an action for product liabilityClaim of injury suffered because of a defective product.—a claim of injury suffered because of a defective product (in your case, of course, the ladder). The legal concept of product liability, he explains, developed out of the principles of tort law. He goes on to say that in cases of product liability, there are three grounds for pursuing a claim and seeking damages—what lawyers call three “theories of recovery”: • Negligence • Strict liability • Breach of warranty As the plaintiff, he emphasizes, you’ll want to use as many of these three grounds as possible.Nancy A. Kubasek, Bartley A. Brennan, and M. Neil Browne, The Legal Environment of Business: A Critical Thinking Approach, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2009), 376. Grounds of Negligence In selecting defendants in your case, you’ll start with the manufacturer of the ladder. Manufacturer’s negligence—carelessness—can take three different forms:This section is based on Nancy A. Kubasek, Bartley A. Brennan, and M. Neil Browne, The Legal Environment of Business: A Critical Thinking Approach, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2009), 377–81. • Negligent failure to warn. The manufacturer may be liable if the company knew (or should have known) that, without a warning, the ladder would be dangerous in ordinary use or in any reasonably foreseeable use. It’s possible, for example, that you made the ladder’s collapse more likely by placing it at a less than optimal angle from the wall of the house. That mistake, however, is a reasonably foreseeable use of the product, and if the manufacturer failed to warn you of this possibility, the company is liable for failure to warn. • Negligent failure to warn. The manufacturer may be liable if the company knew (or should have known) that, without a warning, the ladder would be dangerous in ordinary use or in any reasonably foreseeable use. It’s possible, for example, that you made the ladder’s collapse more likely by placing it at a less than optimal angle from the wall of the house. That mistake, however, is a reasonably foreseeable use of the product, and if the manufacturer failed to warn you of this possibility, the company is liable for failure to warn.This example is borrowed from Scott Baldwin, Francis Hare, and Francis E. McGovern, The Preparation of a Product Liability Case (New York: Aspen Publishers Online, 1998), 2–38, http://books.google.com/books?id=KOvn3Dz5-HAC&pg=PA76&lpg=PA76&dq=ladder%2Bdefective+design& source=web&ots=5fE8wEN7Yp&sig=RfevWGFp_s9jsZbfq9t7P_wnOHQ&hl=en&sa =X&oi=book_result&resnum=7&ct=result (accessed November 12, 2011). • Negligent design. As the term suggests, this principle applies to defectively designed products. In law, a product is defective if, despite any warnings, the risk of harm outweighs its usefulness in doing what it’s designed to do. If, for example, your ladder left the manufacturer’s facility with rivets that were likely to break when weight was placed on it, the ladder may be judged defective in its design. • Negligent design. As the term suggests, this principle applies to defectively designed products. In law, a product is defective if, despite any warnings, the risk of harm outweighs its usefulness in doing what it’s designed to do. If, for example, your ladder left the manufacturer’s facility with rivets that were likely to break when weight was placed on it, the ladder may be judged defective in its design. Figure 16.3 The U.S. Consumer Product Safety Commission has overseen the recall of thousands of baby cribs that it determined to have defective designs. • Negligence per se. The manufacturer may be liable if the ladder fails to meet legal standards. According to standards set by the Occupational Safety and Health Administration (OSHA), for example, the rungs on your ladder should be corrugated or covered with skid-resistant material to minimize slipping. If you’re injured because they’re not, the manufacturer may be liable on grounds of negligence per se.Occupational Safety and Health Administration, Stairways and Ladders: A Guide to OSHA Rules (Washington, DC: U.S. Dept. of Labor, 2003), 7, 7, http://www.freeoshainfo.com/pubpages/Files/Walking%20Working%20Surfaces%20%28Slips%20Trips%20Falls%29/StairsLaddersHandbook.pdf (accessed November 12, 2011). If you decide to apply the concept of negligence in suing the manufacturer of the ladder, you must prove the four elements of a negligence case that we detailed above—namely, the following: 1. That the defendant (the manufacturer) owed you a duty of care 2. That the defendant breached this duty of care 3. That the defendant’s breach of duty of care caused injury to you or your property 4. That the defendant’s action did in fact cause the injury in question Grounds of Strict Liability For the sake of argument, let’s say that your lawyer isn’t very confident about pursuing a claim of negligence against the manufacturer of your ladder. The company doesn’t appear to have been careless in any of the three forms prescribed by law, and it will in any case be difficult to demonstrate all four elements required in negligence cases. He suggests instead that you proceed on grounds of strict liability, pointing out that the principle of strict liability often makes the plaintiff’s legal task less exacting. But (you ask) if the company wasn’t negligent, how can it be liable, either “strictly” or in any other sense? Under the doctrine of strict liability in tort, he replies, you don’t have to prove negligence on the manufacturer’s part. He goes on to explain that under this doctrine, your right to compensation for injury is based on two legal suppositions: 1. Certain products put people at risk of injury no matter how much care is taken to prevent injury. 2. Consumers should have some means of seeking compensation if they’re injured while using these products.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 93. Day in and day out, of course, people use ladders quite successfully. According to the Consumer Product Safety Commission (CPSC), however, every year accidents involving ladders cause three hundred deaths and one hundred thirty thousand injuries requiring emergency medical treatment.American Ladder Institute, “Ladder Safety and Education” (2002), at http://www.laddersafety.org/ (accessed November 12, 2011); see also “Ladder Injuries Climbing, Study Finds,” ConsumerAffairs.com, May 1, 2007, http://www.consumeraffairs.com/news04/2007/05/ladder_safety.html (accessed November 12, 2011). In a certain number of these instances, the ladder is defective, and in cases of strict liability, it doesn’t matter how much care was taken by the manufacturer to prevent defects. This seems a little harsh to you, but your lawyer explains that, in establishing the doctrine of strict liability in tort, the court cited two reasons for making the grounds of liability so strict:See Greenman v. Yuba Power Products (1963), http://online.ceb.com/CalCases/C2/59C2d57.htm (accessed November 12, 2011). • The manufacturer can protect itself by taking steps to anticipate and prevent hazardous product features, but the public can’t. • The manufacturer can protect itself by purchasing insurance and passing the cost on to the public in the form of higher product prices. Again, the public enjoys no such protection. Under these conditions, the manufacturer is willing to take a risk—namely, the risk of making available a product that’s potentially dangerous, especially if defective. The manufacturer thus takes the first step in a process whereby this product reaches a consumer who may suffer “overwhelming misfortune” by using it, especially if it has become defective during the process that takes it from the manufacturer to the user. “Even if he is not negligent in the manufacture of the product,” declared the court, the manufacturer “is responsible for its reaching the market” (italics added). There’s no way of telling when or how a product will become defective or of predicting how or how many people will be injured by it. Defects and injuries, however, are “constant” dangers when people use such products, and users must therefore have some form of “constant protection” under law. That protection is established by the doctrine of strict liability in tort. Why should the manufacturer be held responsible for such defects and injuries? Because, reasoned the court, “the manufacturer is best situated to afford…protection.” And this, explains your lawyer, is why you’re going to sue the manufacturer of your ladder on grounds of strict liability. Strict Liability in the Distribution Chain You’re excited about the prospect of recovering monetary damages from the manufacturer of your ladder, but you continue to wonder (on completely hypothetical grounds, of course) whether the doctrine of strict liability is as fair as it should be. What about all the other businesses involved in the process of getting the product from the manufacturer to the user—especially the one that did in fact introduce the defect that caused all the trouble? Does the doctrine of strict liability relieve them of all liability in the case? Indeed not, your lawyer assures you. The concept of strict liability not only provides more practical grounds for suing the manufacturer but also supports your right to pursue claims against members of the manufacturer’s distribution chain (see Chapter 9 "Marketing: Providing Value to Customers").See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 370. That’s one reason, he points out, why product-liability lawsuits against businesses that sell such “unreasonably dangerous” products as ladders (or even deliver them to worksites) went up a hundredfold between 1950 and 2001, to a total of$205 billion.Conrad Shawn, “Tackling Product Liability: NLBMDA to Introduce Product Liability Legislation,” AllBusiness, January 1, 2006, http://www.allbusiness.com/wholesale-trade/merchant-wholesalers-durable-goods-lumber/855278-1.html (accessed November 12, 2011).

Figure 16.4 "Negligence versus Strict Liability" provides a simplified overview of the difference between negligence and strict liability as grounds for a product-liability claim.

Figure 16.4 Negligence versus Strict Liability

Types of Warranties

A warrantyGuarantee that a product meets certain standards of performance. is a guarantee that a product meets certain standards of performance. In the United States, warranties are established by the Uniform Commercial Code (UCC)U.S. system of statutes designed to make commercial transactions consistent in all fifty states., a system of statutes designed to make commercial transactions consistent in all fifty states. Under the UCC, a warranty is based on contract law and, as such, constitutes a binding promise. If this promise—the promise that a product meets certain standards of performance—isn’t fulfilled, the buyer may bring a claim of product liability against the seller or maker of the promise.

Express Warranties

An express warrantyWarranty created when a seller affirms that a product meets certain standards of quality, description, performance, or condition. is created when a seller affirms that a product meets certain standards of quality, description, performance, or condition. The seller can make an express warranty in any of three ways:

• By describing the product
• By making a promise of fact about the product
• By providing a model or sample of the product

Sellers aren’t obligated to make express warranties. When they do make them, it’s usually made through advertisements, catalogs, and so forth, but they needn’t be made in writing; they can be oral or even inferred from the seller’s behavior. They’re valid even if they’re made by mistake.

Implied Warranties

There are two types of implied warrantiesWarranty arising automatically out of a transaction.—that is, warranties that arise automatically out of transactions:

• In making an implied warranty of merchantability, the seller states that the product is reasonably fit for ordinary use. In selling you a ladder, for example, Ladders ’N’ Things affirms that it satisfies any promises made on its packaging, meets average standards of quality, and should be acceptable to other users.
• An implied warranty of fitness for a particular purpose affirms that the product is fit for some specific use. Let’s say, for example, that you had asked the manager at Ladders ’N’ Things whether the ladder you had in mind was fit for holding a scaffolding platform for painting a house; if the manager had assured you that it was, he would have created an implied warranty of fitness for a particular purpose.

Table 16.3 "What Warranties Promise" provides a more complete overview of the different types of warranties, including more-detailed descriptions of the promises that may be entailed by each.

Table 16.3 What Warranties Promise

Type of Warranty Means by Which the Warranty May Be Created Promises Entailed by the Warranty
Express warranty

Seller confirms that product conforms to the following:

• Any description of it
• Any model or sample of it
Product meets certain standards of quality, description, performance, or condition
Implied warranty of merchantability Law implies certain promises

Product:

• Is fit for ordinary purposes for which it’s used
• Is adequately contained, packaged, and labeled
• Is of an even kind, quality, and quantity within each unit
• Conforms to any promise or statement of fact made on container or label
• Passes without objection in the trade
• Meets a fair, average, or middle range of quality
Implied warranty of fitness for a particular purpose Law implies certain promises

Product is fit for the purpose for which the buyer acquires it if

• Seller has reason to know the particular purpose for which it will be used
• Seller makes a statement that it will serve that purpose
• Buyer relies on seller’s statement and purchases it

What kinds of warranties did you receive when you bought your ladder? Naturally, you received implied warranties of merchantability, which arose out of your transaction with Ladders ’N’ Things. You also received an implied warranty of fitness for a particular purpose (that the ladder would hold a scaffolding platform) and an express warranty (that it would a bear a weight of three hundred pounds per rung).

Do you have a case for product liability on grounds of breach of warranty? Arguably, says your lawyer, Ladders ’N’ Things breached an implied warranty of merchantability because it sold you a ladder with a defect (corrosion damage) that made it unfit for ordinary use. It’s also possible that the retailer breached an express warranty—the manager’s assurance that the ladder would bear a weight of three hundred pounds per rung. First, the court will want to know whether that express warranty was a contributing factor—not necessarily the sole factor—in your decision to buy the ladder. If not, you probably can’t recover for breach of the express warranty.

Second, there’s the complex issue of whether that express warranty was tantamount to an assurance that the ladder could be used for such a job as roofing. Apparently your uncle thought it was, but that will be a matter for your lawyer to argue and the court to decide. It will all depend, in other words, on the flexibility and fairness of the legal system.

Product Liability and Agency Law

When your lawyer has wrapped up his explanation of warranties and ways of breaching them, you feel compelled to ask one last question: Why is Ladders ’N’ Things, an entire corporate chain of retail stores, liable for breach of warranty committed by one department manager at one local outlet? Your lawyer replies that it’s a matter of agencyLegal relationship in which one party acts on behalf of, and under the control of, another., which he defines for you as a legal relationship between two parties in which one party acts on behalf of, and under the control of, another. In a principal-agent relationship like the one diagrammed in Figure 16.5 "Agency Relationship" the agent is acting on behalf of the principal.

Figure 16.5 Agency Relationship

A lawyer acting on behalf of a client is an agent, as is a real estate broker acting on behalf of a homeowner or a partner acting on behalf of a partnership. Perhaps the most common type of agency relationship is the one that applies to your case—the salesperson who’s acting on behalf of a retailer. If this sort of legal arrangement sounds familiar, that’s probably because employer-employee relationships are also agency relationships.

Agency law is actually a mixture of contract law and tort law.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 509. In order to appoint an agent, for example, a person must possess the capacity—the legal ability—to make a contract, and agency agreements must in general meet the four elements of a valid contract that we discussed in an earlier section of this chapter. As we’ve also seen, an agent (such as the department manager at your local Ladders ’N’ Things outlet) can make the principal for whom he or she is acting liable for such torts as breach of warranty. The same thing is true of the warehouse manager who stored your ladder next to a shipment of liquid-nitrogen–based fertilizer; acting on behalf of Ladders ’N’ Things, he or she exposed the company to liability for negligence.

Seeking Damages

So, what’s your best course of action? You could sue both the manufacturer and the retailer, but to streamline things, your lawyer files only a strict-liability suit against the manufacturer, who agrees to settle out of court and pay damages. The manufacturer subsequently sues Ladders ’N’ Things, charging that the retailer’s negligence and breach of warranty were contributing causes of your injury. The jury agrees that the retailer’s actions were proximate causes of your injury and orders Ladders ’N’ Things to contribute to the fund of damages that the manufacturer has agreed to pay you.This hypothetical outcome is based on Economy Engineering v. Commonwealth (1992), http://masscases.com/cases/sjc/413/413mass791.html (accessed November 12, 2011).

The Goals of Tort Law

Imposing damages is the chief means by which the legal system meets the primary goal of tort law—compensating injured parties, or, more precisely, restoring victims to the conditions that they would have been in had their injuries never taken place. As we just saw, you settled out of court, but only after your attorney had notified the ladder manufacturer of your intent to seek damages. As the victim of a tort, you may have sought two major types of damages.See Nancy A. Kubasek, Bartley A. Brennan, and M. Neil Browne, The Legal Environment of Business: A Critical Thinking Approach, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2009), 339–47.

Compensatory Damages

The most common type of damages sought by plaintiffs, compensatory damagesMonetary awards intended to restore tort victims to the conditions that they would have been in had their injuries never taken place. are monetary awards intended to meet the primary goal of legal action in tort cases. Some measures of compensatory damages are easier to establish than others—say, such expenses as medical costs. Likewise, if your injury keeps you from working at your job or profession, the court can calculate the amount that you would have earned while you were incapacitated. Things get more complicated when plaintiffs make claims involving pain and suffering or emotional distress (which may include both present and future physical and mental impairment). In deciding whether or not to award compensatory damages for such claims, it’s the job of judges and juries to use common sense, good judgment, and general experience.See “Compensatory Damages,” Law Library: American Law and Legal Information (2008), http://law.jrank.org/pages/5947/Damages-Compensatory-Damages.html (accessed November 12, 2011).

Punitive Damages

Awarded in addition to compensatory damages, punitive damagesMonetary awards to tort victims intended to deter similar injurious conduct in the future. are intended to deter similar injurious conduct in the future. Some experts regard punitive damages as particularly useful in discouraging manufacturers from making unsafe products: if there were no risk of punitive damages, they argue, a manufacturer might find it cheaper to market an unsafe product and compensate injured consumers than to develop a safer product. To determine whether punitive damages are called for, a court usually considers “the degree of reprehensibility of the defendant’s conduct”—that is, the extent to which the defendant’s action was flagrant or unconscionable.BMW of North America v. Gore (1996), http://www.law.cornell.edu/supct/html/94-896.ZO.html (accessed November 12, 2011); Nancy A. Kubasek, Bartley A. Brennan, and M. Neil Browne, The Legal Environment of Business: A Critical Thinking Approach, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2009), 341–43.

The Goals of Contract Law

Note that basically the same types of damages are available in cases involving contract law, which we discussed previously. In contract law, the purpose of imposing monetary damages is to correct the wrong done when a contract is breached. Compensatory damages are paid by the party that breached the contract to compensate for losses suffered by the nonbreaching party. As in tort law, in other words, compensatory damages are awarded to restore the victim (the nonbreaching party) to the condition that he or she (or it) would have been in had the contract not been breached. Because each party entered into the contractual bargain in order to receive some benefit from it, the purpose of compensatory damages is to restore the “benefit of the bargain” to the nonbreaching party.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 270–71.

Courts typically don’t award punitive damages for breach of contract. They may be considered, however, if the breaching of the contract is accompanied by some kind of intentional tort, such as fraud or intentional failure to act fairly in discharging the contract.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 277. The purpose of punitive damages is to punish the breaching party, to deter it from similar conduct in the future, and to set an example for other parties to legal contracts.

As you can see from Figure 16.6 "Remedies for Breach", there are two categories of contractual breach. A minor breach occurs when the breaching party has achieved a level of substantial performance—that is, completed nearly all the terms of the contract. In the event of a minor breach, the nonbreaching party may seek damages. A material break occurs when one party renders inferior performance—performance that destroys the value of the contract. In such cases, the nonbreaching party may seek to rescind the contract and to recover damages to compensate for any payments made to the breaching party.See Henry R. Cheesman, Contemporary Business and Online Commerce Law: Legal, Internet, Ethical, and Global Environments, 5th ed. (Upper Saddle River, NJ: Pearson Education, 2006), 267–68.

Figure 16.6 Remedies for Breach

Key Takeaways

• Product liability is a claim of injury suffered because of a defective product. In such cases, there are three grounds for pursuing a claim and seeking damages (that is, three “theories of recovery”): negligence, strict liability, and breach of warranty. Most plaintiffs use as many of these three grounds as possible.
• In a product-liability case, a manufacturer’s negligence can take three different forms:

1. Negligent failure to warn. The manufacturer may be liable if the company knew (or should have known) that, without a warning, the ladder would be dangerous in ordinary use or in any reasonably foreseeable use.
2. Negligent design. A product is defective if, despite any warnings, the risk of harm outweighs its usefulness in doing what it’s designed to do.
3. Negligence per se. The manufacturer may be liable if the ladder fails to meet legal standards.
• Strict liability torts involve actions that are inherently dangerous and for which a party may be liable no matter how carefully he or she performs them. Under the doctrine of strict liability in tort, the plaintiff doesn’t have to prove negligence on the manufacturer’s part, nor does it matter how much care was taken by the manufacturer to prevent defects. The doctrine of strict liability rests on two legal conclusions:

1. The manufacturer can protect itself by taking steps to anticipate and prevent hazardous product features, but the public can’t.
2. The manufacturer can protect itself by purchasing insurance and passing the cost on to the public in the form of higher product prices; the consumer has no such protection. The manufacturer is liable under the doctrine of strict liability for any harm that comes to a person from using the product, especially if it has become defective during the process of getting the product from the manufacturer to the user. The concept of strict liability also supports the plaintiff’s right to pursue claims against members of the manufacturer’s distribution chain.
3. Breaching a warranty—a guarantee that a product meets certain standards of performance—is grounds for recovering in a product-liability case. An express warranty is created when a seller affirms that a product meets certain standards of quality, description, performance, or condition. An implied warranty arises automatically out of a transaction and takes one of two forms: (1) an implied warranty of merchantability (which states that the product is reasonably fit for ordinary use) and (2) an implied warranty of fitness for a particular purpose (which states that the product is fit for some specific use).
4. Agency is a legal relationship between two parties in which one party acts on behalf of, and under the control of, another. In a principal–agent relationship, the agent is acting on behalf of the principal. Employer-employee relationships are also agency relationships.
5. The primary goal of tort law is restoring the victim to the condition that he or she would have been in had no injury ever taken place. Likewise, the primary goal of contract law is restoring the nonbreaching party to the condition that he or she would have been in had the contract not been breached. To achieve these goals, the legal system provides for monetary awards in the form of compensatory damages. Another form of monetary award, punitive damages, is intended to punish, to deter similar injurious conduct in the future, or to set an example.

Exercise

(AACSB) Analysis

Upbeat Pharmaceutical Company manufactures a flu vaccine. Several people who got the vaccine became ill. One of them required hospitalization for two weeks. Medical experts believe the vaccine was the cause of their illnesses. Do the people who got sick after taking the vaccine have a valid claim against Upbeat? On what basis?