1. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved Business Law MAN-3 Erlan Bakiev, Ph. D. Warranties, Product Liability, and Consumer Protection

2. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 2 Introduction (1 of 2) warranties  Article 2 of the Uniform Commercial Code (UCC) establishes certain warranties that apply to the sale of goods warranties  Article 2A of the UCC establishes warranties that apply in lease transactions  Consumers and others can sue to recover damages caused by breach of warranty

3. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 3 Introduction (2 of 2) Warranty  A buyer’s or lessee’s assurance that the goods meet certain standardsWarranty Products Liability  The liability of manufacturers, sellers, and others for the injuries caused by defective products Products Liability  The liability of manufacturers, sellers, and others for the injuries caused by defective products

4. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 4 Warranties of Quality  Seller’s or lessor’s assurance to buyer or lessee that the goods meet certain standards of quality  If the goods fail to meet a warranty, the buyer or lessee can sue the seller or lessor for breach of warranty expressedimplied  Warranties may be expressed or implied

5. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 5 Express Warranties (1 of 2)  Created when a seller or lessor makes an affirmation that the goods he or she is selling or leasing meet certain standards of quality, description, performance, or condition [UCC 2-313(1); UCC 2A-210(1)]  It is not necessary to use formal words such as warrant or guarantee to create an express warranty [UCC 2-313(2); UCC 2A-210 (2)]

6. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 6 Express Warranties (2 of 2)  Sellers and lessors are not required to make such warranties  Statements of Opinion  Statements of Opinion – sales “puffing” by salespersons usually does not create an express warranty; it is merely a statement of opinion [UCC 2-313(2)]

7. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 7 Implied Warranty of Merchantability  Unless properly disclosed, a warranty is implied when sold or leased goods are fit for the ordinary purpose for which they are sold or leased, and other assurances [UCC 2- 314(1); UCC 2A-212(1)]  The implied warranty of merchantability does not apply to sales or leases by non- merchants or casual sales

8. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 8 Standards That Must Be Met Implied Warranty of Merchantability: Standards That Must Be Met  The goods must be fit for the ordinary purposes for which they are used  The goods must be adequately contained, packaged, and labeled  The goods must be of an even kind, quality, and quantity within each unit  The goods must conform to any promise or affirmation of fact made on the container or label  The quality of the goods must pass without objection in the trade  Fungible goods must meet a fair average or middle range of quality  The goods must be fit for the ordinary purposes for which they are used  The goods must be adequately contained, packaged, and labeled  The goods must be of an even kind, quality, and quantity within each unit  The goods must conform to any promise or affirmation of fact made on the container or label  The quality of the goods must pass without objection in the trade  Fungible goods must meet a fair average or middle range of quality

9. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 9 Implied Warranty of Fitness for Human Consumption (1 of 2)  A warranty that applies to food or drink consumed on or off the premises of: Restaurants Grocery stores Fast-food outlets Vending machines

10. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 10 Implied Warranty of Fitness for Human Consumption (2 of 2) Consumer Expectation Test  A test to determine merchantability based on what the average consumer would expect to find in food products Consumer Expectation Test  A test to determine merchantability based on what the average consumer would expect to find in food products Foreign Substance Test  A test to determine merchantability based on foreign objects that are found in food Foreign Substance Test  A test to determine merchantability based on foreign objects that are found in food

11. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 11 Implied Warranty of Fitness for a Particular Purpose  A warranty that arises where a seller or lessor warrants that the goods will meet the buyer’s or lessee’s expressed needs  The warranty is breached if the goods do not meet the buyer’s or lessee’s expressed needs  The warranty applies to both merchant and nonmerchant sellers and lessors

12. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 12 Summary: Express and Implied Warranties of Quality (1 of 2) Type of WarrantyHow CreatedDescription Express warrantyMade by the seller or lessor Affirmation that the goods meet certain standards of quality, description, performance, or condition [UCC 2-313(1); UCC 2A-210(1)] Implied warranty for fitness for a particular purpose Implied by lawImplied that the goods are fit for the purpose for which the buyer or lessee acquires the goods [UCC 2-315; UCC 2A-213]

13. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 13 Summary: Express and Implied Warranties of Quality (2 of 2) Type of WarrantyHow CreatedDescription Implied warranty of merchantability Implied by law if the seller or lessor is a merchant Implied that the goods: 1. Are fit for the ordinary purposes for which they are used 2. Are adequately contained, packaged, and labeled 3. Are of an even kind, quality, and quantity within each unit 4. Conform to any promise or affirmation of fact made on the container or label 5. Pass without objection in the trade 6. Meet a fair average or middle range of quality for fungible goods [UCC 2- 314(1); UCC 2A-212(1)]

14. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 14 Damages Recoverable for Breach of Warranty  Compensatory Damages: Damages that are generally equal to the difference between the value of the goods as warranted and the actual values of the goods accepted at the time and place of acceptance [UCC 2-714(2), UCC 2A-508(4)]

15. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 15 Warranty Disclaimers disclaimed  Warranties can be disclaimed or limited express warranty  If an express warranty is made, it can only be limited if the disclaimer and the warranty can he reasonably construed with each other implied warranties  All implied warranties of quality may be disclaimed by expressions like as is, with all faults, or other language that makes it clear to the buyer that there are no implied warranties

16. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 16 Conspicuous Display of Disclaimer  Written disclaimers must be conspicuously displayed to be valid  Conspicuous  Conspicuous – construed by the courts as noticeable to a reasonable person [UCC 2- 316; UCC 2A-214]

17. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 17 Magnuson-Moss Warranty Act (1 of 2)  Federal statute that regulates express full and limited warranties made by sellers and lessors  The Act does not require a seller or lessor to make express written warranties  However, persons who do make such warranties are subject to the provisions of the Act

18. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 18 Magnuson-Moss Warranty Act (2 of 2)  The Act does not create any implied warranties  However, sellers or lessors who make express written warranties relating to consumer products are forbidden from disclaiming or modifying the implied warranties of merchantability and fitness for a particular purpose

19. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 19 Misrepresentation Product Liability Based on Fault: Misrepresentation intentional misrepresentation  A buyer or lessee who is injured because a seller or lessor fraudulently misrepresented the quality of a product can sue the seller under the tort of intentional misrepresentation  Seller or lessor either: Affirmatively misrepresents the quality of a product, or Conceals a defect in it  Recovery is limited to persons who were injured because they relied on the misrepresentation intentional misrepresentation  A buyer or lessee who is injured because a seller or lessor fraudulently misrepresented the quality of a product can sue the seller under the tort of intentional misrepresentation  Seller or lessor either: Affirmatively misrepresents the quality of a product, or Conceals a defect in it  Recovery is limited to persons who were injured because they relied on the misrepresentation

20. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 20 Negligence Product Liability Based on Fault: Negligence  Negligence  Negligence – a tort related to defective products where the defendant has breached a duty of care and caused harm to the plaintiff  Failure to exercise due care includes: Failing to assemble the product carefully Negligent product design Negligent inspection or testing of the product Negligent packaging Failure to warn of the negligent propensities of the product  Negligence  Negligence – a tort related to defective products where the defendant has breached a duty of care and caused harm to the plaintiff  Failure to exercise due care includes: Failing to assemble the product carefully Negligent product design Negligent inspection or testing of the product Negligent packaging Failure to warn of the negligent propensities of the product

21. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 21 McPherson v. Buick Motor Company Landmark Case: McPherson v. Buick Motor Company  The court held that an injured consumer could recover damages from the manufacturer of a product even though he or she was only in privity of contract with the retailer from whom he or she had purchased the product

22. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 22 Strict Liability doctrine of strict liability in tort  In Greenman v. Yuba Power Products, Inc., the California Supreme Court adopted the doctrine of strict liability in tort as a basis for product liability actions  Most states have adopted this doctrine as the basis for product liability actions  Removes many of the difficulties for the plaintiff associated with other theories of product liability

23. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 23 Chain of Distribution Strict Liability: Chain of Distribution chain of distribution strictly liable  All parties in the chain of distribution of a defective product are strictly liable for the injuries caused by that product doctrine of strict liability in tort  All manufacturers, distributors, wholesalers, retailers, lessors, and subcomponent manufacturers may be sued under this doctrine (doctrine of strict liability in tort)

24. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 24 Defective product causes injury Negligence lawsuit Strict liability Consumer Retailer Distributor Manufacturer (negligent) Defective product Defendant All in the chain of distribution are liable Negligent party is liable Doctrines of Negligence and Strict Liability Compared Strict Liability Lawsuit Negligence Lawsuit

25. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 25 Parties Who Can Recover Strict Liability: Parties Who Can Recover  Privity of contract is not required for a plaintiff to sue for strict liability  The doctrine applies even if the injured party had no contractual relations with the defendant  The damages recoverable in a strict liability action vary by jurisdiction

26. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 26 Damages Recoverable Strict Liability: Damages Recoverable  Punitive damages  Punitive damages are often awarded in strict liability lawsuits if the plaintiff proves that the defendant either: Intentionally injured him or her; or Acted with reckless disregard for his or her safety

27. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 27 The Concept of Defect defective  To recover for strict liability, the injured party must first show that the product that caused the injury was somehow defective  Plaintiffs can allege multiple product defects in one lawsuit

28. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 28 1. Defects in Manufacture 2. Defects in Design 3. Defects in Packaging 4. Failure to Warn Common Types of Defects

29. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 29 Crashworthiness Doctrine The courts have held that automobile manufacturers are under a duty to design automobiles so they take into account the possibility of harm from a person ’ s body striking something inside the automobile in the case of a car accident.

30. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 30 Other Product Defects  Failure to provide adequate instructions  Inadequate testing of products  Inadequate selection of component parts or materials  Improper certification of the safety of a product

31. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 31 Defenses to Product Liability 1.Supervening Event 2.Generally Known Dangers 3.Assumption of the Risk 4.Government Contractor Defense 1.Supervening Event 2.Generally Known Dangers 3.Assumption of the Risk 4.Government Contractor Defense 5.Misuse of the Product 6.Statute of Limitations and Statute of Repose 7.Contributory and Comparative Negligence 5.Misuse of the Product 6.Statute of Limitations and Statute of Repose 7.Contributory and Comparative Negligence

32. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 32 Federal Food, Drug, and Cosmetic Act (FDCA) of 1938 Landmark Law: Federal Food, Drug, and Cosmetic Act (FDCA) of 1938 (as amended)  Provides the basis for the regulation of much of the testing, manufacture, distribution, and sale of foods, drugs, cosmetics, and medicinal products and devices in the United States  Administered by the Food and Drug Administration (FDA)  The FDA is empowered to regulate food, food additives, drugs, cosmetics, and medicinal devices

33. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 33 Regulation of Food adulterated food  The FDCA prohibits the shipment, distribution, or sale of adulterated food false and misleading labeling of food products  The FDCA prohibits false and misleading labeling of food products  It mandates affirmative disclosure of information on food labels  A manufacturer may be held liable for deceptive labeling or packaging

34. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 34 Food Labeling  Nutrition Labeling and Education Act: A federal statute that requires food manufacturers and processors to provide nutritional information on most foods and prohibits them from making scientifically unsubstantiated health claims The law applies to packaged foods, fruits, vegetables, and raw seafood

35. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 35 United Nations Biosafety Protocol for Genetically Altered Foods  A United Nations sponsored protocol that requires signatory countries to place the label “may contain living modified organism” on all genetically engineered foods

36. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 36 Regulation of Drugs (1 of 2)  The FDCA gives the FDA the authority to regulate the testing, manufacture, distribution, and sale of drugs Drug Amendment to the FDCA  The Drug Amendment to the FDCA gives the FDA broad powers to license new drugs in the United States  The manufacture, distribution, or sale of adulterated or misbranded drugs is prohibited

37. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 37 Regulation of Drugs (2 of 2)  The law requires all users of prescription and nonprescription drugs to receive: Proper directions for use  Including method and duration of use Adequate warnings about any related side effects

38. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 38 Regulation of Cosmetics (1 of 2)  The FDA has issued regulations that require cosmetics: To be labeled To disclose ingredients To contain warnings if they are carcinogenic or otherwise dangerous to a person’s health

39. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 39 Regulation of Cosmetics (2 of 2)  The manufacture, distribution, or sale of adulterated or misbranded cosmetics is prohibited  The FDA may remove from commerce cosmetics that contain unsubstantiated claims e.g., preserving youth e.g., growing hair

40. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 40 Regulation of Medicinal Devices Medicinal Device Amendment to the FDCA  The Medicinal Device Amendment to the FDCA gives the FDA authority to regulate medicinal devices and equipment  The mislabeling of medicinal devices is prohibited  The FDA is empowered to remove “quack” devices from the market

41. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 41 Consumer Product Safety Act (1972) Regulation of Product Safety: Consumer Product Safety Act (1972)  Federal statute that regulates potentially dangerous consumer products Consumer Product Safety Commission (CPSC)  Created the Consumer Product Safety Commission (CPSC)

42. Copyright © 2006 by Pearson Prentice-Hall. All rights reserved. 12 - 42 Consumer Product Safety Commission Regulation of Product Safety: Consumer Product Safety Commission Independent federal regulatory agency empowered to: 1.Adopt rules and regulations to interpret and enforce the Consumer Product Safety Act 2.Conduct research on safety 3.Collect data regarding injuries