Its Legal, Ethical & Global Environment 6 th Ed. Its Legal, Ethical & Global Environment 6 th Ed. B U S I N E S S MARIANNE M. JENNINGS Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. Chapter 11 Product Advertising and Liability

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 2 Development of Product Liability  Initially No Liability for the Seller Courts followed a theory of Caveat Emptor (‘Let the buyer beware’)  Caveat Emptor Removed in Section 402A of the Restatement of Torts Law has swung from no liability to almost per se liability.  Initially No Liability for the Seller Courts followed a theory of Caveat Emptor (‘Let the buyer beware’)  Caveat Emptor Removed in Section 402A of the Restatement of Torts Law has swung from no liability to almost per se liability.

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 3 Advertising as a Contract Basis for Product Liability  Express Warranties Creation Affirmation of fact or promise of performance (samples, model, descriptions) Restriction Must be part of the basis of the bargain Disclaimer Cannot make a disclaimer inconsistent with an express warranty  Express Warranties Creation Affirmation of fact or promise of performance (samples, model, descriptions) Restriction Must be part of the basis of the bargain Disclaimer Cannot make a disclaimer inconsistent with an express warranty

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 4  Case 11.1 Castro v. QVC Network, Inc. (1998) Was the pan represented as suitable for roasting a 25 lb. Turkey? What is the relationship between tort liability and warranty liability? Did the pan pass the risk/utility test?  Case 11.1 Castro v. QVC Network, Inc. (1998) Was the pan represented as suitable for roasting a 25 lb. Turkey? What is the relationship between tort liability and warranty liability? Did the pan pass the risk/utility test? Advertising as a Contract Basis for Product Liability

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 5 Federal Regulation of Warranties and Advertising  Federal Trade Commission Act Authorizes FTC as Enforcement Agency Passed in 1914 Federal Trade Commission given broad authority Requires regulation of “unfair and deceptive trade practices”  Federal Trade Commission Act Authorizes FTC as Enforcement Agency Passed in 1914 Federal Trade Commission given broad authority Requires regulation of “unfair and deceptive trade practices”

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 6 Federal Regulation of Warranties and Advertising  FTC broadened by Wheeler-Lea Act of 1938 “Is public deceived?” standard Not limited to adverse impact on competition  FTC Improvements Act of 1980 Put some restrictions on FTC regulation  FTC broadened by Wheeler-Lea Act of 1938 “Is public deceived?” standard Not limited to adverse impact on competition  FTC Improvements Act of 1980 Put some restrictions on FTC regulation

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 7  Types of FTC Regulation Content control and accuracy “No aspirin,” “aspirin free,” all dairy products, and so on (like express warranties) Performance claims Advertiser must be able to prove claim Corrective advertising FTC has required corrective advertising when unsubstantiated claims have been made.  Types of FTC Regulation Content control and accuracy “No aspirin,” “aspirin free,” all dairy products, and so on (like express warranties) Performance claims Advertiser must be able to prove claim Corrective advertising FTC has required corrective advertising when unsubstantiated claims have been made. Federal Regulation of Warranties and Advertising

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 8  Case 11.2 Warner-Lambert Co. v. FTC (1977) What proposals for corrective advertising are made in the order? What modification in the order does the court make?  Case 11.2 Warner-Lambert Co. v. FTC (1977) What proposals for corrective advertising are made in the order? What modification in the order does the court make? Federal Regulation of Warranties and Advertising

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 9  Types of FTC Regulation Celebrity endorsements Celebrity must have used the product If the celebrity has not used the product, the source of claims must be given Bait and switch Prohibits advertising cheaper product and then getting customers to buy the more expensive product  Types of FTC Regulation Celebrity endorsements Celebrity must have used the product If the celebrity has not used the product, the source of claims must be given Bait and switch Prohibits advertising cheaper product and then getting customers to buy the more expensive product Federal Regulation of Warranties and Advertising

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 10  Types of FTC Regulation Product comparisons FTC took a laissez-faire approach during the 1980s It encouraged comparisons Congress amended trademark law in 1989 to allow competitors to bring suit for deceptive statements about products in competitor’s ads  Types of FTC Regulation Product comparisons FTC took a laissez-faire approach during the 1980s It encouraged comparisons Congress amended trademark law in 1989 to allow competitors to bring suit for deceptive statements about products in competitor’s ads Federal Regulation of Warranties and Advertising

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 11  Case 11.3 S.C. Johnson v. Clorox Co. (2001) What was the standard to determine the truthfulness of the Clorox Glad Lock ad? What is the Lanham Act? How were customers being misled about the ads?  Case 11.3 S.C. Johnson v. Clorox Co. (2001) What was the standard to determine the truthfulness of the Clorox Glad Lock ad? What is the Lanham Act? How were customers being misled about the ads? Federal Regulation of Warranties and Advertising

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 12  Types of FTC Regulation FTC remedies Consent decree is a negotiated settlement  Ad Regulation by FDA FDA is regulating more as more prescription medications are directly advertised  Types of FTC Regulation FTC remedies Consent decree is a negotiated settlement  Ad Regulation by FDA FDA is regulating more as more prescription medications are directly advertised Federal Regulation of Warranties and Advertising

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 13 State Regulation of Advertising  Professional Ads Most states have limitations on the types of ads used by professionals  Professional Ads Most states have limitations on the types of ads used by professionals

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 14 Types of Product Related Accidents

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 15 Contract Product Liability Theories: Implied Warranties  Implied Warranty of Merchantability (§ 2-314) Given in every sale of goods by a merchant Goods are fit for ordinary purposes Average quality with adequate packaging  Implied Warranty of Merchantability (§ 2-314) Given in every sale of goods by a merchant Goods are fit for ordinary purposes Average quality with adequate packaging

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 16 Contract Product Liability Theories: Implied Warranties  Case 11.4 Mexicali Rose v. Superior Court (1992) What is the foreign-natural test? What is the reasonable expectation test? Which test is better?  Case 11.4 Mexicali Rose v. Superior Court (1992) What is the foreign-natural test? What is the reasonable expectation test? Which test is better?

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 17 Contract Product Liability Theories: Implied Warranties  Implied Warranty of Fitness for a Particular Purpose (§ 2-315) Requirements Seller has particular skill or judgment Buyer is relying on that skill or judgment Seller knows or has reason to know of reliance Seller makes recommendation to buyer  Implied Warranty of Fitness for a Particular Purpose (§ 2-315) Requirements Seller has particular skill or judgment Buyer is relying on that skill or judgment Seller knows or has reason to know of reliance Seller makes recommendation to buyer

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 18 Contract Product Liability Theories: Implied Warranties  Eliminating Warranties by Disclaimers Can disclaims both implied warranties by using “with all faults,” “as they stand,” “as is” Can also disclaim by using the names of both warranties in clear language  Eliminating Warranties by Disclaimers Can disclaims both implied warranties by using “with all faults,” “as they stand,” “as is” Can also disclaim by using the names of both warranties in clear language

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 19 Contract Product Liability Theories: Implied Warranties  Privity Standards (§ 2-318) Privity at buyer level—three code alternatives Alternative A—buyer, members of household, and guests Alternative B—any natural person expected to use goods Alternative C—extends to any person expected to use the goods  Privity Standards (§ 2-318) Privity at buyer level—three code alternatives Alternative A—buyer, members of household, and guests Alternative B—any natural person expected to use goods Alternative C—extends to any person expected to use the goods

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 20 Tort Liability: Product Liability Under Section 402A  Strict Tort Liability (§ 402A) Defendant had duty to manufacture a reasonably safe product/was in the business of selling or manufacturing product That duty was breached Breach of duty caused plaintiff’s injury (product reached plaintiff in same condition) Foreseeable that defect would cause injury Plaintiff has property or physical damages  Strict Tort Liability (§ 402A) Defendant had duty to manufacture a reasonably safe product/was in the business of selling or manufacturing product That duty was breached Breach of duty caused plaintiff’s injury (product reached plaintiff in same condition) Foreseeable that defect would cause injury Plaintiff has property or physical damages

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 21 Tort Liability: Product Liability Under Section 402A  Unreasonably Dangerous Defective Condition Design defect Improper warnings or insufficient instructions Negligent packaging, manufacturing, or handling Example: Drug tampering/food tampering cases  Unreasonably Dangerous Defective Condition Design defect Improper warnings or insufficient instructions Negligent packaging, manufacturing, or handling Example: Drug tampering/food tampering cases

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 22 Tort Liability: Product Liability Under Section 402A  Case 11.5 Schoen v. Spotlight Co., Inc. (1997) Did the nightgown meet federal standards for children’s sleepwear What liability theories were proposed again Spotlight and Wal-Mart  Case 11.5 Schoen v. Spotlight Co., Inc. (1997) Did the nightgown meet federal standards for children’s sleepwear What liability theories were proposed again Spotlight and Wal-Mart

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 23 Tort Liability: Product Liability Under Section 402A  Manufacturing, Handling, or Processing Error Product must be properly manufactured, handled and packaged to avoid liability  Reaching the Buyer in the Same Condition No substantial change in product design that caused malfunction or injury Product not tampered with during distribution  Manufacturing, Handling, or Processing Error Product must be properly manufactured, handled and packaged to avoid liability  Reaching the Buyer in the Same Condition No substantial change in product design that caused malfunction or injury Product not tampered with during distribution

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 24 Tort Liability: Product Liability Under Section 402A  Requirement of a Seller Engaged in a Business Need not be a merchant Need not be “in the business” of selling that product Example: peanuts sold at games by a baseball club In some cases recovery has been allowed against groups of sellers.  Requirement of a Seller Engaged in a Business Need not be a merchant Need not be “in the business” of selling that product Example: peanuts sold at games by a baseball club In some cases recovery has been allowed against groups of sellers.

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 25 Negligence : A Second Tort for Product Liability  Suits Based on Negligence Same elements as strict tort liability plus prior knowledge of defective condition Punitive damages if plaintiff can show manufacturer/seller knew of defect  Suits Based on Negligence Same elements as strict tort liability plus prior knowledge of defective condition Punitive damages if plaintiff can show manufacturer/seller knew of defect

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 26 Privity Issues Tort Theories of Product Liability  Does not require privity of contract  Was injury to that party foreseeable  Should anticipate household use, presence of children, and so on  Does not require privity of contract  Was injury to that party foreseeable  Should anticipate household use, presence of children, and so on

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 27 Defenses to Product Liability Torts  Misuse or abnormal use: Exceeding weight limitations, using around flames  Contributory negligence: complete defense that overlaps with misuse  Comparative Negligence: reduces the amount of recovery.  Assumption of risk Plaintiff aware of danger Does it anyway  Misuse or abnormal use: Exceeding weight limitations, using around flames  Contributory negligence: complete defense that overlaps with misuse  Comparative Negligence: reduces the amount of recovery.  Assumption of risk Plaintiff aware of danger Does it anyway

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 28 Defenses to Product Liability Torts  Case 11.6 Binakonsky v. Ford Motor Co. (1998) What role does Binakonsky’s blood- alcohol level play in the case? If Binakonsky would have died regardless of the design, should there be recovered under product liability?  Case 11.6 Binakonsky v. Ford Motor Co. (1998) What role does Binakonsky’s blood- alcohol level play in the case? If Binakonsky would have died regardless of the design, should there be recovered under product liability?

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 29 Product Liability Reform  Movement Toward Reform Verdicts and costs affect international competitiveness Congress has made efforts to make laws uniform Businesses need to focus on prevention  Movement Toward Reform Verdicts and costs affect international competitiveness Congress has made efforts to make laws uniform Businesses need to focus on prevention

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 30 Federal Standards  Consumer Product Safety Commission Federal Penalties of $2,000 per Violation Up to $500,000 Maximum (willful violations carry $50,000 and/or 1 year)  Uniform Product Liability Law The Department of Commerce has tried to get states to adopt uniform product liability laws  Consumer Product Safety Commission Federal Penalties of $2,000 per Violation Up to $500,000 Maximum (willful violations carry $50,000 and/or 1 year)  Uniform Product Liability Law The Department of Commerce has tried to get states to adopt uniform product liability laws

Copyright ©2003 by West Legal Studies in Business, a division of Thomson Learning. All rights reserved. 31 International Issues in Product Liability  EU Trying to Gain Uniformity “State-of-the-Art” Defense Product as good as it can be upon release International Standards Organization’s 9000 guidelines for quality assurance  EU Trying to Gain Uniformity “State-of-the-Art” Defense Product as good as it can be upon release International Standards Organization’s 9000 guidelines for quality assurance