© 2006 Prentice Hall Ch THE LEGAL ENVIRONMENT OF BUSINESS A Critical Thinking Approach Fourth Edition Nancy K. Kubasek Bartley A. Brennan M. Neil Browne Nancy K. Kubasek Bartley A. Brennan M. Neil Browne

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch CHAPTER 13 Product and Service Liability Law

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Product Liability Scope of the problem… 34.4 million product injuries per year 24,400 fatalities 1 million lawsuits $700 billion in costs

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Product Liability Theories of Recovery: NegligenceNegligence Breach of warranty Strict product liability

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch NegligenceNegligence Negligence Theory: The privity requirement Manufacturer—Retailer—Consumer MacPherson v. Buick — discarded privity

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch NegligenceNegligence Negligence Actions: Failure to warn or inadequate warning Failure to warn or inadequate warning Design defect (all units are faulty) Design defect (all units are faulty) Manufacturing defect (some units are faulty) Manufacturing defect (some units are faulty) Inadequate testing Inadequate testing Negligent advertising Negligent advertising Negligence per se Negligence per se Defenses to Negligence: Contributory negligence Contributory negligence Comparative negligence Comparative negligence Assumption of risk Assumption of risk Misuse of product Misuse of product Statute of limitations Statute of limitations Statute of repose Statute of repose State-of-the-art defense State-of-the-art defense Defenses to Negligence: Contributory negligence Contributory negligence Comparative negligence Comparative negligence Assumption of risk Assumption of risk Misuse of product Misuse of product Statute of limitations Statute of limitations Statute of repose Statute of repose State-of-the-art defense State-of-the-art defense

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Breach of Warranty Breach of Warranty Approaches: Warranties are imposed in sales of goods via UCC Article 2 Express warranties Implied warranties Implied warranty of merchantability Implied warranty of fitness for a particular purpose

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Breach of Warranty Implied Warranty of Merchantability Pass without objection in the trade Fair or average quality (and uniformly so among all units) Fit for ordinary purpose Adequate packaging Conform to promises on label Implied Warranty of Fitness for a Particular Purpose Knowledgeable seller Consumer reasonably relies on seller’s expertise in selecting the product Consumer is injured when product fails Implied Warranty of Fitness for a Particular Purpose Knowledgeable seller Consumer reasonably relies on seller’s expertise in selecting the product Consumer is injured when product fails

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Breach of Warranty Express Warranties: Seller provides: Description of goods Promise or statement about performance Model or sample Product fails, causing injury

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Breach of Warranty Defenses to Warranty Cases: Disclaimers: “As is” Limits as to type of defect Limits as to remedy Disclaimers: “As is” Limits as to type of defect Limits as to remedy Statute of Limitations: Four years for breach of warranty Cf. 3 years for tort Statute “runs” from date of discovery of breach, not from date of sale Statute of Limitations: Four years for breach of warranty Cf. 3 years for tort Statute “runs” from date of discovery of breach, not from date of sale

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Strict Product Liability Strict Liability Theory: Not based in culpability of defendant Not based in culpability of defendant Based on cost-shifting from injured plaintiff to manufacturer Based on cost-shifting from injured plaintiff to manufacturerRATIONALE Manufacturing is needed for mass production, consumer- based economy Some injuries will result Manufacturers can better absorb costs by collecting incremental price from consumers, spreading costs and purchasing liability insurance RATIONALE Manufacturing is needed for mass production, consumer- based economy Some injuries will result Manufacturers can better absorb costs by collecting incremental price from consumers, spreading costs and purchasing liability insurance

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Strict Product Liability Strict Liability in Tort Section 402(A) of the Restatement (Second) of Torts: Product defective when sold Defect made product unreasonably dangerous Product caused injury to plaintiff Seller is not excused from liability even though Reasonable care was used in manufacture No privity of contract exists

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Strict Product Liability Defects in Products Design defects (all units are faulty) Consumer expectation test Feasible alternatives test Manufacturing defects (some units are faulty)

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Strict Product Liability Section 402(A) of the Restatement (Third) of Torts Adopted in 1997 Adopted in 1997 Manufacturing defects—strict liability Manufacturing defects—strict liability Design defects—reasonableness standard Design defects—reasonableness standard Warning defects—liability imposed when risks could have been reduced via warning Warning defects—liability imposed when risks could have been reduced via warning

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Strict Product Liability Defenses to Strict Liability Product misuse Product misuse Assumption of risk Assumption of risk Majority Rule State-of-the-art defense is no defense Majority Rule State-of-the-art defense is no defense Section 402(A) involves sellers and buyers. Yet, courts have consistently held that bystanders may also sue, even though they did not purchase product What about Liability of Bystanders?

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Market Share Liability Problem: Plaintiff suffers injury caused by numerous manufacturers over a long period of exposure…but cannot claim injury was caused by specific product or seller Context: Medicinal drug cases, medical implants, multiple plaintiffs and defendants

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Market Share Liability Market Share Liability Theory: Sindell v. Abbott Laboratories (1982) “Enterprise Liability” Doctrine Plaintiffs can recover against all defendants jointly, each defendant liable in proportion to their share of market at the time of injury

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Service Liability Usual Context: professional malpractice cases Other theories of recovery: negligence; breach of contract; fraud Professional malpractice cases are increasing

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Accountants’ Liability Prevalent in the area of securities law Theories: negligence; breach of contract; fraud Standard of care: AICPA, GAAP, GAAS Parties can include both clients and third parties* Third Party Liability of Accountants *Limitations on liability  Ultramares Doctrine: no privity-no liability  Section 552 R. (2d) Torts: known reliance  Reasonable Foreseeability: possible reliance Trend in the law: increasing liability Service Liability

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Global Dimensions The foreign manufacturer may not be subject to jurisdiction Judgment may not be collectible against foreign entity Result: Local business may be liable for entire judgment What if a U.S. importer-retailer sells a defective product manufactured overseas?

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Global Dimensions International Liability: Easier, generally, for foreign plaintiff to obtain jurisdiction over U.S. entity U.S. business may be subject to many strict liability laws Foreign law even more strongly favors plaintiff- consumers

© 2006 Prentice Hall THE LEGAL ENVIRONMENT OF BUSINESS Ch Summary Product liability law is based in tort Strict liability generally easier to prove for plaintiff Product liability law does not require privity or even a sale Plaintiff will usually name retailer, wholesaler, distributor, and manufacturer as defendants