THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch The Legal Environment of Business A Critical Thinking Approach 5 th Edition Nancy K. Kubasek Bartley A. Brennan M. Neil Browne

THE LEGAL ENVIRONMENT OF BUSINESS CHAPTER 13 Product and Service Liability Law © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch. 13-2

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Product Liability Scope of the problem…  34.4 million product injuries per year  24,400 fatalities  1 million lawsuits  $700 billion in costs

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Product Liability Theories of Recovery:  Negligence  Breach of Warranty  Strict product liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Privity Requirement - One is a party to a contract Negligence Retailer Consumer Manufacturer MacPherson v. Buick – discarded the privity requirement

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Negligence Actions:  Failure to warn or inadequate warning  Design defect (all units are faulty)  Manufacturing defect (some units are faulty)  Inadequate testing  Negligent advertising  Negligence per se Defenses to Negligence:  Contributory negligence  Comparative negligence  Assumption of risk  Misuse of product  Statute of limitations  Statute of repose  State-of-the-art defense Negligence

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch 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 Breach of Warranty

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch 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 Breach of Warranty

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Express Warranties:  Seller provides:  Description of goods  Promise or statement about performance  Model or sample  Product fails, causing injury Breach of Warranty

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Defenses to Warranty Cases: 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 Breach of Warranty

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch  NOT based in culpability of defendant  Based on cost-shifting from injured plaintiff to manufacturer 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. Strict Product Liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Section 402(A) of the Restatement 2nd 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 Strict Product Liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Defects in Products  Design defects (all units are faulty)  Consumer expectation test  Feasible alternatives test  Risk – Utility test  Manufacturing defects (some units are faulty) Strict Product Liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Section 402(A) of the Restatement 3rd of Torts  Adopted in 1997  Manufacturing defects—strict liability  Design defects — reasonableness standard  Warning defects — liability imposed when risks could have been reduced via warning Strict Product Liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Defenses to Strict Liability  Product misuse  Assumption of risk Majority Rule: State-of-the-art defense is no defense Strict Product Liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch What about Liability of Bystanders? Section 402(A) involves sellers and buyers. Yet, courts have consistently held that bystanders may also sue, even though they did not purchase product. Strict Product Liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall 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

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Market Share Liability Case: Sindell v. Abbott Laboratories (1982) Plaintiffs can recover against all defendants jointly, each defendant liable in proportion to their share of market at the time of injury

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Service Liability  Professional malpractice cases are increasing  Other theories of recovery:  negligence  breach of contract  fraud

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall 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  Ultramares Doctrine: no privity - no liability  Section 552 R. (2d) Torts: known reliance  Reasonable Foreseeability: possible reliance Trend in the law: increasing liability *Limitations on liability Service Liability

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall 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?

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Global Dimensions International Liability:  Generally, it is easier for a foreign plaintiff to obtain jurisdiction over a U.S. entity.  U.S. business may be subject to many strict liability laws.  Foreign law strongly favors plaintiff-consumers.

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch Summary  Product liability law is based in tort.  Strict liability is 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.

THE LEGAL ENVIRONMENT OF BUSINESS © 2009 Pearson Education, Inc. publishing as Prentice Hall Ch All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall