1. © Cavico & Mujtaba, 2008 Business Law for the Entrepreneur and Manager Frank Cavico and Bahaudin G. Mujtaba Chapter 3 – Products Liability

2. © Cavico & Mujtaba, 2008 Business Law for the Entrepreneur and Manager (Frank Cavico & Bahaudin g. Mujtaba, 2008; ILEAD Academy, LLC) Table of Contents – Chapter Titles Chapter 1 – Introduction to Law and the Legal System Chapter 2 – Torts and Business Chapter 3 – Products Liability Chapter 4 – Contract Law Chapter 5 – Sales Law and the Uniform Commercial Code Chapter 6 – Agency and Employment Law Chapter 7 – Business Organizations Chapter 8 – Commercial Paper and Banking Transactions Chapter 9 – Creditors and debtors – Rights and Responsibilities Chapter 10 – Internet Law Chapter 11 – Intellectual Property Law Chapter 12 – Real Property Law Chapter 13 – International Business Law Chapter 14 – Liability of Accountants and Other Professionals Chapter 15 – Wills and Trusts Chapter 16 – Personal Property, Gifts, and Bailment Chapter 17 – Conclusion and Case Problems

3. © Cavico & Mujtaba, 2008 Chapter Topics U.S. Legal Doctrines –Introduction –Contract Law –Tort Law – Negligence and Fraud –Warranty Law –Strict Liability in Tort –The Consumer Products Safety Commission –Conclusion –Summary

4. © Cavico & Mujtaba, 2008 U.S. Legal Doctrines Introduction Several legal theories in the U.S. impact on product safety, to wit, contract law, the tort of negligence, the tort of fraud, warranty law based on the Uniform Commercial Code and federal statute, and a relatively new and very significant legal doctrine – strict liability in tort If there is a contractual relationship between the consumer and the seller of the product, the seller will be obligated by virtue of contract law to fulfill the duties and promises created by the contract as to the nature, characteristic, and quality of the product

5. © Cavico & Mujtaba, 2008 Tort Law – Negligence and Fraud The tort of negligence requires that the manufacturer, wholesaler, distributor, and retailer of the product exercise reasonable and ordinary care in the manufacture, distribution, and sale of the product Entities on the marketing chain all have a duty to exercise due care not to harm the consumer or user of the product. The failure to comply with this legally imposed duty of due care may subject an entity on the marketing chain to legal liability based on the Anglo-American common law of negligence negligence is not an insurance scheme, and consequently a manufacturer is not acting illegally if a consumer was harmed by an unavoidable risk or one that could not have reasonably been foreseen or prevented

6. © Cavico & Mujtaba, 2008 Warranty Law Warranty law, based predominantly in the United States on the Uniform Commercial Code (UCC), will require that the seller of the product “live up to” the claims that are expressly made about the product as well as to comply with any warranties that are implied in the transaction and are imposed by the law The injured consumer may confront certain major obstacles when pursuing legal rights under UCC warranty law. First, there is no legal obligation that the manufacturer or seller make any express warranties at all There are notice and common law privity requirements in attempting to hold certain parties on the marketing chain liable for breach of warranty. Therefore, establishing warranty liability emerges as a difficult task for the injured consumer.

7. © Cavico & Mujtaba, 2008 Strict Liability in Tort Strict liability is a doctrine that is very frequently asserted by the consumers harmed by products. The doctrine is a common law formulation Strict liability in tort holds that one who sells any product in a defective condition unreasonably dangerous to the user, the consumer, or his or her property is liable to the ultimate user or consumer if: 1.The seller is engaged in the business of selling such a product 2.The product is expected to, and in fact does, reach the user or consumer without substantial change in the condition in which it was sold

8. © Cavico & Mujtaba, 2008 The doctrine of strict liability in tort applies although: 1.The seller has exercised all possible care in the preparation, distribution, and sale of the product 2.The user or consumer has not purchased the product from, or entered into any contractual relationship with, the seller of the product, thereby obviating the old contract “privity” requirement The essence of strict liability in tort for products is the finding of a “defect” in the product. Products can be deemed “defective” in three ways: 1) the product contains a “flaw,” 2) the product lacks a warning, or 3) the product is defectively designed A product can be deemed defective because it lacks a warning or the warning is inadequate. To be legally sufficient, the warning must address the nature and severity of the risk, how the consumer should handle the risk, as well as indicate any reasonable alternatives Products liability litigation in the United States also has dealt with tobacco, guns, and “fast food,” and particularly the relationship of these products to the design defect component to the strict tort liability doctrine The emerging area of products liability lawsuits in the U.S. deals with food, specifically “fast food,” and the allegation that such food causes obesity and related health problems

9. © Cavico & Mujtaba, 2008 The Consumer Products Safety Commission The Consumer Products Safety Commission (CPSC) is a U.S., federal, independent, regulatory agency, created by Congress in Consumer Product Safety Act (CPSA) in 1972 CPSA does not create an additional private lawsuit for damages for consumers injured by dangerous products; rather the CPSA affords the consumer as a private party the right to sue for an injunction to prevent violations of the Act or rules and regulations promulgated by the CPSC

10. © Cavico & Mujtaba, 2008 Conclusion The use of any product involves some degree of risk; and accordingly a key legal question under U.S. common law, statutory law, as well as regulatory principles, is to ascertain the acceptable level of known risk Generally speaking, a product will be legally safe if it complies with the applicable legal standards for product safety; and if there are still risks attendant to the use of the product, it nevertheless will be deemed legally safe if the risks are known and judged acceptable and reasonable to a rational person in view of the benefits to be derived from the use of such a “risky” product

11. © Cavico & Mujtaba, 2008 Summary Products are made for the purposes of fulfilling consumers’ needs and desires as well as creating profits for businesses. However, the liability that comes with the development of new products can be very high, depending upon the product itself and the relevant laws Tort laws were initially established in the products field to help consumers attain justice due to harm caused by products the tort laws, lawsuits, and other legal mechanism have allowed manufacturing firms to create efficient and effective products that are beneficial to all, while protecting consumers from defective products that cause harm

12. © Cavico & Mujtaba, 2008 Reference 1.Cavico, F. & Mujtaba, B. G., (2008). Business Law for the Entrepreneur and Manager. ILEAD Academy Publications; Davie, Florida, USA. ISBN: 978-0-9774-2115-2. 2.Cavico, F. and Mujtaba, B. G. (2008). Legal Challenges for the Global Manager and Entrepreneur. Kendal Hunt Publishing; United States.