BUSINESS TORTS and PRODUCT LIABILITYChapter 7

Torts in the Business SettingThere is no such thing as a business tort.By definition, this means torts that concern businesses.Often cases with businesses are settled out of court.There are usually big awards, as plaintiffs view businesses as deep pockets.

The Types and Costs of Business TortsCosts of Tort SystemAverage annual cost of $260 billion per year 2/3 of that involves business.Businesses lobby for statutory limits on tort liability.Pain & suffering and punitive damages place a high sticker price on certain behavior.Types of TortsIntentional NegligenceStrict LiabilityTorts are traditionally common law.More and more statutes are playing an important role in this area of the law.See Exhibit 7.1

Torts Particular To BusinessesIntentional Misrepresentation or FraudInterference With Contractual RelationsInterference With Prospective AdvantageProduct LiabilityConsumer Products & NegligenceStrict Liability in TortPrimary Areas of Product Liability LawUltrahazardous Activity

FraudDeliberate DeceptionThe tort may be called fraud, misrepresentation, fraudulent misrepresentation or deceitIntentional Misrepresentation or FraudRelationship of parties is a factor in creating legal duties1) Representation has been made knowingly2) Without belief in its truth, OR3) Recklessly and careless whether it is true or falseMalice, intent, knowledge and other conditions of a persons mind may be alleged generally (Rule 9b, Federal Rules of Civil Procedure)Often added to a suit of breach of contractSee Lightle v. Real Estate Commission

Intentional Misrepresentation or Fraud#1 Misstatement of an important or material factMisstatement induces another to enter into some sort of business relationshipUnrelated or unimportant misstatement cannot be a basis of fraud, i.e. hyping a product#2 Scienter or intent to defraudIntentionally misleading and deceiving another#3 Person knows or has reason to know that statement being made is false#4 Recipient of false information justifiably relies on the information and makes a decision to enter into the deal#5 Privity between the parties relationship exists#6 Proximate Cause logical link between reliance on misstatement & losses to the plaintiff# 7 Damages

Lightle v. Real Estate CommissionLightle, Alaska real estate agent, listed house for sale by Leighs.Williams's made offer to buy conditioned on obtaining mortgage.Another realtor had a client, Seeley was interested in the house.Lightle said house was available as the first offer was dead.Seeley made an offer; Leighs accepted. Seeley cancelled her existing lease, switched utilities, prepared to move.Unknown to Seeley, Lightle wrote on her offer it was a back-up contract if Williams's couldnt get their financing.Seeley found out, rescinded offer, demanded her deposit back.Seeley filed a claim against the Alaska Real Estate Commissions surety fund (to compensate losses in real estate due to fraud).Commission heard case held that Lightle committed fraudulent misrepresentation. Awarded Seeley damages. Suspended Lightles real estate license.Lightle appealed.HELD: Affirmed Commissions ruling.Lightle said that prior deal was dead; that Seeley offer had been accepted, and the house is yours.Lightle made partial disclosure but failed to disclose facts that might have affected Seeleys decision.

Interference With Contractual Relationsand Interference With Prospective Advantage (Putting A Cog in the Wheels)Interference with Contractual RelationsBreaking the contract benefits a 3rd party1. Existence of a contractual relationship2. 3rd party knows about the contract3. 3rd party intentionally interferes with the contractual relationshipSee ASC Construction Equipment USA v. City Commercial Real EstateSee Exhibit 7.2Interference With Prospective Economic AdvantageA business attempts to improve its place in the market by interfering with anothers businessUnreasonable, improper manner of interferencePredatory behavior, not merely competitiveSee MDM Group v. CX Reinsurance Co.See Test Yourself, p. 186See Issue Spotter Hiring Employees from Competitors

ASC Construction Equipment USA v. City Commercial Real EstateASC hired City to serve as ASCs exclusive real estate agent in Atlanta.ASC was looking for land to develop 2 showrooms for Volvo.City found suitable land.Received 5% commission for ASCs purchasesAt ASCs request, City then called for construction proposals.Invited developers to pitch construction alternativesEach developer promised to pay City a commission if it got the job.One developer, Seefried, did not have in-house construction services.Seefried called upon Catamount Constructors to help with its bid.Seefried & Catamount had no contract, but Seefried anticipated hiring Catamount if it won the construction job. ASC then decided to handle construction directly.This meant City would get no commission for arranging construction.ASC told Catamount not to proceed further with City & hired Catamount to build one of the showrooms.City got no commission . (Continued)

ASC Construction Equipment USA v. City Commercial Real Estate, cont.City sued ASC for tortious interference with business relations.Jury awarded City $467,674 in compensatory damages and $1.25 million in punitive damagesASC appealed.HELD: Affirmed in part; reversed in part and case remanded.To recover under tortious interference, plaintiff must show defendant1) acted improperly & without privilege,2) acted purposely with malice and intent to injure3) induced 3rd party not to enter into or continue relationship with plaintiff4) caused financial injuryFirst element requires proof that intermeddler was stranger to the relationshipEvidence presented no basis for jury to find ASC was a stranger to Citys business relationship with Catamount.Object of ASCs interference (prospective commission agreement between City & Catamount) was mechanism to effect verbal agreement between City & ASC regarding Citys compensation.No tortious interference; punitive award cannot stand.

MDM Group Associates v. CX Reinsurance Company, Ltd.MDM is insurance broker insures ski resorts against risk that # of ski days during ski season would fall below a certain minimum.CX and others agreed to write policies for them.MDM received a commission of 12.5%. Premiums grew to $3 million, but poor snow in 1999-2000 created lost ski days.Ski resorts made insurance claims. CX resisted, negotiated, mediated, litigated with $23 million in claims payouts.CX stopped issuing policies, which it had a right to do.MDM sued CX for intentional interference with prospective business relations for not renewing policies with ski resorts resulting in MDM not receiving commissions.Contended CX handled the ski resort claims poorly. Jury awarded MDM $6.75 million in damages. CX appealed.HELD: Reversed & remanded with judgment in favor of CX.There is no interference when the defendant (CX) decided not to renew policies.There is no interference when MDM and CX have a contract that is affected by CXs decisions not to renew other contracts (with ski resorts) and cancellation of contracts with ski resorts means lack of commissions to MDM.MDM cannot maintain an action against CX for interference with any contract of which CX is a party.

Product LiabilityLiability of producers and sellers of goods re: defective productsOn one hand, we want companies to have incentives to ensure their products are safe.On the other hand, we do not want companies to pay for injuries consumers suffer while using products improperly.General term applied that deals primarily in tort lawInvolves some contract law Involves some statutory law

Is Japan Really Different?It is usually said that Japan has less litigation and fewer lawyers.

Some analysts say fewer lawsuits make Japan more competitive.

In fact, the U.S. and Japanese tort systems are similar (even if the rules are different).

History of Consumer Products and NegligenceIn the 19th century courts, there was the privity of contract requirement a contractual relationship with the manufacturer was neededBurden on consumerIf there was no relationship, caveat emptor applied Let the buyer bewareThis changed with MacPherson v. Buick Motor Company

Negligence in TortManufacturer must exercise reasonable care under the circumstances.Were the dangers foreseeable? Care must be taken to avoid misrepresentation.Defects and dangers must be revealed.Causal connection must be present between the product or the design defect and the injury.By the 1960s, courts began to apply strict liability. Producers are responsible for damages and punitive damages may be added.This theory can be used in conjunction with and as a separate theory from strict liability in a lawsuit.

MacPherson v. Buick Motor Company (1916 landmark case)Buick sells cars to dealers.NY dealer sells car to MacPherson. Wheels made by another company; wheel collapses, causing accident that results in injury.MacPherson files a negligence suit; Buick says it has no privity with MacPherson; trial court holds that privity is not required; MacPherson wins.NY Ct. of Appeals holds manufacturer has primary control over product design & safety.Defects could have been discovered by reasonable inspection, which was omitted.Buick is responsible for the finished product.Judgment affirmed.

You Cant Be Too Careful: Winning Warning LabelsOn the underside of a cereal bowl: Always use this product with adult supervision.On a washing machine: Do not put any person in this washer.On a baby stroller: Remove child before folding.On a cell phone: Dont try to dry your phone in a microwave oven.On the Yellow Pages: Please do not use this directory while operating a moving vehicle.On a wart removal product instruction booklet: Do not use if you cannot see clearly to read the information in the information booklet.On a gas tank: Never use a lit match or open flame to check fuel level.

Strict Liability Created Under Contract LawImplied Warranty of safetyManufactured ProductsFood ProductsImplied Warranty of MerchantabilityUnder the UCC Implied Warranty For Fitness For A Particular PurposeImplied AT LAW whether the manufacturer wants the warranty for the product or notSee Issue Spotter: Understanding Product ProblemsExpress WarrantyGuarantee of safety or performanceBy modelBy statementBy contractBy advertisingMisrepresentation theory is used as well to create strict liabilityEx: Baxter v. Ford Motor Company

Baxter v. Ford Motor Company (1932 case)Baxter buys Model A.Printed material states Triple Shatter-Proof Glass--will not fly or shatter under the hardest impact. . .it eliminates the danger of flying glass.Rock hits windshield Baxter loses left eye.Trial court did not allow advertising to be admitted into evidence; said there was no privity of contract.Baxter appeals.Held: Trial court erred in taking the case from the jury.Representations of Ford were false and Baxter relied on them.Ford failed to provide the safety glass as advertised.Breach of express warranty.Reversed and remanded to grant a new trial allowing advertisement to be admissible evidence.

Strict Liability In Tort Manufacturers are strictly liable for defective productsThe courts ask:Was the product defective?Did the defect create an unreasonably dangerous product or instrumentality?Was the defect a proximate cause or substantial factor of the injury?Did the injury cause damages?Courts do not worry about carefulness, due care, reasonableness, etc.

Strict Liability in Tort Law California Changes Law: Greenman v. Yuba PowerWife buys husband power tool.Two years later wood flies out of machine, striking Greenmans head.He alleges breaches of warranties and negligence.However: S. Ct. of Calif. affirms trial court decision in favor of Greenman and says that the manufacturer is strictly liable in tort.By mid-1970s every state supreme court had adopted strict liability rule.

Im From the FBI: I Know the LawFBI Special Agent Clymer jumped the curb with his pickup.Was found passed-out drunk (blood alcohol 0.306).He was in his truck, with an empty bottle of rum.The truck caught fire and police pulled him out.Claimed he stopped along the road to make a call, had the pickup in Park, then he somehow lost consciousness and truck somehow produced heavy smoke that filled the passenger cab.He sued Chevy and the Chevy dealer for selling him a defective vehicle.

Restatement (Third) of Torts on Products Liability

The American Law Institutes (ALI) definition of strict liability in Section 402A of the Restatement (Second of Torts).This was the leading rule adopted by most states to define liability for product-related injury.ALI wrote a new standard for product defect cases in newer Restatement (Third) of Torts.State supreme courts consider the new concepts of law and often gradually adopt it.Key part to the Restatement (Third) of Torts define categories of defect in 2 regarding (a) product departing from intended design, (b) foreseeable risk of harm could be reduced or avoided by an alternative design and (c) harm could have been reduced by reasonable instructions or warnings.Restatement Third speaks of risk-utility balancing.Restatement Third encourages courts to move away from the a distinction between negligence and strict liability.Product defect law deals with design defects and manufacturing defects.See Parish v. ICON Issue: Failure to warn under the standards of Restatement (Third) of Torts.

Parish v. ICONParish was jumping on a backyard trampoline made by Jumpking.Surrounded by a safety net (fun ring) made by ICONHe did a back somersault, landed on his head, rendered a quadriplegic.Sued ICON and Jumpking for failure to warn of dangers in using products.District court granted summary judgment for manufacturers; Parish appealed.HELD: Affirmed. Warnings were not inadequate.Look at reasonable instructions or warnings if foreseeable risks of using a product. Numerous warnings provided in this case.3 warnings placed permanently on pad of trampoline.Included warnings not to land on head or neck; paralysis or death could result; reduce chance of landing on head or neck by not doing somersaults/flips; only 1 person on trampoline at a time; multiple jumpers increase chances of loss of control, collision, falling off; results can be broken head, neck, back or leg; not recommended for children under 6 years of age. (Continued on next slide)

Parish v. ICON, cont.Had nationally recognized warning symbols on the product.1 warning on each of 8 legs of Jumpking trampoline designed to assemble so that warnings face out, visible to user.Jumpking manufactures 2 printed non-pictorial warnings sewn onto the trampoline bed.Warning placard for the owner to affix to the trampoline both pictorial warning and language re: safe use of trampoline.Owners manual contains warnings found on trampoline, plus additional warning re: supervision and educational instruction.Warnings exceed the warnings required by the American Society for Testing and Material (ASTM).Warnings are also provided with fun ring, which has separate owners manual with added warnings.Restatement says that users must pay some attention for their own safety.Users and consumers are required to bear appropriate responsibility for proper product use.Prevents careless users and consumers from being subsidized by more careful users and consumers damages paid from law suits are built into higher product prices.Warnings here were adequate.

Strict Liability and the Failure To Warn Standard(Manufacturers wonder how far laws will go)Gun mfgr. is liable for failure to warn of possible damage to users hearing from long-term exposure to gun fire.Diet-food producer is liable for failure to warn about using adult diet food as baby food.Commercial pizza dough roller machine mfgr. liable when worker sticks hands in machine to clean it & machine is on.Johnson & Johnson pays $8.85 million to a liver transplant patient due to the fact years of drinking & taking Tylenol had destroyed his liver. Company knew drinking & taking regular doses of Tylenol could damage liver.

Strict Liability & Design Defects Worker receives $750,000. Co-worker removes metal plate & covers machine with cardboard (failing to put plate back). Worker falls into machine and loses his leg. It is a manufacturing design defect that machine can run when the metal plate is removed.Restaurant employee badly burned. He tries to retrieve an item that fell from his shirt pocket into French Fry machine.Child pushed emergency stop button on an escalator, causing person to fall, and be injured. Its a design defect to make a button red kiddies might like it and push it!!!

Reason #4 Why West Virginia Is Considered a Litigation Hellhole?West Virginia Supreme Court Justice Richard Neely, The Product Liability Mess, p. 4

As long as I am allowed to redistribute wealth from out-of-state companies to injured in-state plaintiff, I shall continue to do so. Not only is my sleep enhanced when I give someone elses money away, but so is my job security, because the in-state plaintiffs, their families, and their friends will reelect me.

Timpte Industries, Inc. v. GishGish, a long haul trucker, arrived at a plant to pick up load of fertilizer. His truck was pulling a trailer made by Timpte Industries.It is an open-top, twin hopper trailer, loaded from above by a downspout that pours fertilizer into the topper.Downspout wasnt going into position; he climbed on top of trailer; walked out along the top rail that is about 5 wide so he could grab downspout and put it in position to pour in fertilizer.Was on the rail; gust of wind blew; he fell & was severely injured.Gish (& his workers compensation insurance carrier) sued for design defect.Contended that trailer shouldnt have a ladder that allowed him to climb up to the rail (top rail is too narrow to walk on safely).Timpte argued: Danger of being on rail was open and obvious.District court granted summary judgment for Timpte.Appeals court reversed. Timpte appealed. (Continued)

Timpte Industries, Inc. v. Gish, cont.HELD: Reversed Court of Appeals judgment and reinstated trial courts summary judgment in favor of Timpte.No evidence that the design defects rendered the trailer unreasonably dangerous.Gishs expert witness proposed 3 design changes.1) Remove top 2 rungs of ladder to make it impossible for person to climb atop trailer;2) Provide adequate foothold and handhold at top of trailer;3) If an adequate handhold cannot be provided, widen the side rail to at least 12 to provide adequate footingTexas courts apply risk-utility analysis. Basis of design defect claim is whether there is a reasonable alternative design (at a reasonable cost) that would reduce a foreseeable risk of harm.Timpte always warned users to maintain 3-point contact with trailer (this cant be done if a user standing on the top rail).Gish did not adhere to warning. Loses lawsuit.

Strict Liability and Unknown Hazards or Latent DefectsDangers not known at the time of the products manufactureHazard associated with the product is not learned for many yearsSee Issue Spotter: A Way to Reduce the Damage?Consumer Expectation standard used by courtsWhat is the expectation of an ordinary customer regarding safety of a product?Claims are often class action suitsAsbestos Industry has paid billions of dollars to tens of thousands of plaintiffs in claims over a 30-year periodInjuries caused by IUDs have been in the courts for yearsManufacturers must have recalls or warnings when hazard is detected

Joint and Several LiabilityMost states have held plaintiffs may sue any or all manufacturers to share the liability created.Manufacturers are allowed to fight it out as to which should pay for damages.Any of the defendant-manufacturers may be held responsible for all damagesThe result has been limits on application of joint & several liability in some areas (i.e. medical malpractice) in some states

Busted!Michigan judge Robert Colombo quashed thousands of apparently bogus lawsuits for asbestos-related injuries.Principal examining doctor, Michael Kelly, had diagnosed injuries on 7,323 patients x-rays over 15 years (cost of $500 each).His detection rate of abnormalities was 58 times the detection rate by independent radiologists.Judge found that Kelly was neither radiologist nor pulmonologist.Had failed the certification test for reading x-rays.The day Judge Colombo commenced the investigation of the x-ray evidence, plaintiffs attorneys withdrew all lawsuits except one.

Asbestos Litigation in the United States and United KingdomAsbestos is carcinogen that causes lung cancer & other debilitating conditions.Damages of asbestos were known decades ago; little was done about it.By mid-1970s, litigation exploded.More than 850,000 claims had sued 8,400+ defendants (sellers, (manufacturers, distributors & installers of asbestos-containing products).Has resulted in bankruptcy and reorganizations of many defendants.In U.S. asbestos litigation: the longest running mass tort in U.S. history.Leading 1973 case was Borel v. Fibreboard Paper ProductsBy 2005 RAND study estimated $70 billion spent on compensation & litigation costs through 2002 alone & reasonable estimates range from $200 to $265 billion.Cape Industries plc (UK-based company) was sued and default judgment entered but had no assets in the U.S.Plaintiffs took their judgment to the UK courts for enforcement.UK law didnt recognize Borel theory & court refused to enforce U.S. judgment.Plaintiffs would have to sue Cape under UK law.In UK, loser pays rule in lawsuitsUK court held even though Cape created multinational corporate structure to specifically ensure no recovery by U.S. plaintiffs, UK courts would not disregard the legal structure to enforce judgment against the parent company.

Defenses To Negligence and Strict LiabilityProduct Misuse or Abuse Assumption of Risk Tobacco and alcohol use are controversial areas; so far courts havent applied the defense to users.Sophisticated User Defense and Bulk Supplier DoctrineUsually apply to business settingsBulk supplier does not have to police details of what is done as product continues down the chain, as bulk products go to intermediary in bulk and on down.Sophisticated user is one who reasonably should know of the products dangers e.g. another manufacturer. Ex: Air Force employees who handle certain chemicals have a knowledgeable staff.Some statutory limits exist.

Ultrahazardous ActivityCommon law rules developed about uncommon activities where utmost care is neededi.e. use of explosives, transport of dangerous chemicals, crop dusting, etc.

See Old Island Fumigation (in text)See Test Yourself, p. 204

Perspective On Tort U.S. Litigation Does a costly tort system make American firms less competitive than foreign forms?Not likely, as any company selling their products in the U.S. must meet same liability standard as U.S. companies.High standards of products marketed abroad force improvement of standards worldwide.The tort crisis in the U.S.:has abated since Supreme Court has cracked down on massive punitive damage awards and doubtful expert testimony.Tort reform legislation from Congress has made class actions suits more difficult.State laws are working to cap liability for certain damages.Tort payouts may have stabilized.Between 2004 and 2006, growth seemed to have stopped.HOWEVER, tort litigation involving companies will continue to be a flashpoint in the law injured people seek relief from deep pockets and heartless companies.On the other hand, firms subject to dubious suits are devoting resources to fending off the deep-pocket and frivolous litigators.