Publications: Tort & Product Liability

PRODUCTS LIABILITY LAW IN THE UNITED STATES: CONSIDERATIONS FOR FOREIGN COMPANIES

by Thomas A. Packer

"Products liability" is the name given to that area of United States law involving the liability of those who supply goods or products to purchasers, users, and bystanders for losses of various kinds resulting from defects in those products.

The Legal System in the United States

For those companies marketing products or product components in the United States, it is important to first understand that there are two separate legal systems, the federal (or national) system and the state system. Both the federal courts and the state courts make law and decide cases. Because each of the 50 states makes its own law and there are consequently 50 different sets of laws within the country. A federal court will usually apply the law of the state in which it is located, but there are some distinct federal laws as well. Although there have been proposals made for the establishment of a national set of products liability laws, such proposals have never been enacted.

Thus, because it is possible to be subject to 50 different sets of laws, cases can be decided differently in different states. However, a law which is made by the United States Supreme Court (the highest court in the country) must be followed by all courts. As a result, a person who is injured by a product may bring a lawsuit against the maker of that product (among others, including distributors and retailers) in the state in which he was injured. Thus, even if a foreign company only exports its goods into Texas, if a person is injured by that company's product in California, the lawsuit can be brought in California, and California law would apply.

Organization of Courts in the United States

foreign company that finds its product to be the subject of a lawsuit in the United States will inevitably find the U.S. system of courts to differ from that of the company's home country. The following is a brief overview of how the U.S. legal system is organized.

There are three branches of government that make law in the United States: the legislature, the administrative agencies, and the judiciary. These exist both on the national, or federal, level and in each of the 50 states. Each of these branches makes a different kind of law. Legislatures create statutory law by passing bills, which become law when signed by the executive, meaning the President, for federal laws, and a governor for state laws. Agencies with specific interests (for example, the Environmental Protection Agency) create administrative law, consisting of rules and decisions issued by the agencies. Finally the judiciary makes common law, sometimes informally referred to as judge-made law, which is found in written court decisions of lawsuits. Federal statutory, administrative, and common law apply throughout the United States; the state's statutory, administrative and common law apply only in that state.

The federal courts have three levels, a trial level, an intermediate appellate level, and a final appellate level. At the federal level, the trial courts are called United States District Courts. Each state has within its boundaries at least one federal judicial district, and some states have several. The number of districts in a state is determined primarily by population and the geographic size of the state.

When a party to a lawsuit in a U.S. District Court wants to appeal that court's decision, the appeal normally goes to the U.S. Court of Appeals covering that district. The final appellate court in the federal court system is the Supreme Court of the United States. The U.S. Supreme Court hears appeals from decisions of the U.S. Courts of Appeals, from the highest appellate court of each state (when a federal question is involved) and (on extremely rare occasions) directly from United States District Courts.

State court structure varies from state to state. Many states have three levels, like the federal system, although some have only two, a trial level and one appellate level.

Although the names of the courts differ, they perform essentially the same functions at both the state and federal levels. Trial courts, through either the judge or a jury, decide what the facts in a given dispute are, and what those facts mean in terms of the law - for example, whether they mean guilt or innocence in a criminal trial, and if guilt, what the penalty should be. Appellate courts review to see if the trial judge or jury correctly applied the relevant points of law to the facts determined at the trial level. Except in rare cases, appellate courts do not re-evaluate or re-determine findings of fact made at the trial level.

Jurisdiction

The first question that must be addressed by a foreign company served with a lawsuit in the United States is whether the court has jurisdiction over the foreign entity.

A chief obstacle in obtaining jurisdiction over a foreign defendant is effecting proper service of the lawsuit. It is sometimes possible to serve a foreign defendant in the United States by serving the lawsuit papers on an American subsidiary of the defendant. However, in order to be successful, it must be proven that the subsidiary is a mere instrument for carrying on the business of the parent corporation.

Service of the legal action is made complicated by the need to comply with the Hague Convention on the Service Abroad of Judicial and Extra Judicial Documents in Civil or Commercial Matters. For those countries who have signed on to the Hague Convention, it provides a number of different methods for service abroad, including service through the receiving country's "central authority," delivery by the central authority to an addressee who accepts it "voluntarily," service through diplomatic or consular agents of the sending country, service directly through officials or process servers of the state of destination, service as permitted by internal law of the receiving state, and possibly by direct mail.

Once service of the lawsuit has been accomplished, the court must then determine if it has jurisdiction over the foreign defendant. A court will look to see if that corporation has sufficient "minimum contacts" with that state such that it would not be unreasonable for the defendant to be expected to defend itself and be bound by a judgment in that state. Even if the defendant is a foreign corporation, courts in the United States can exercise jurisdiction over the defendant under so-called "long-arm statutes," provided the foreign corporation has sufficient minimum contacts with the United States. Determining whether a defendant has minimum contacts with a particular state is a very fact-specific inquiry.

Under the "stream of commerce" theory, jurisdiction is warranted if the defendant delivers products into the stream of commerce with the expectation that they will be purchased by consumers in the forum state. However, a court may also require evidence of conduct indicating an intent or purpose to serve the market in the forum state. This conduct would include: doing business in the forum state; having offices, agents, employees or property within the forum state; advertising or soliciting business in the forum state; and creating, controlling or employing the distribution system that brought the product into the forum state.

For foreign defendants, a court will, in addition to the "minimum contacts" factors cited above, also consider the fairness of exercising jurisdiction over a certain defendant. The court will look to such factors as the burden on the defendant in defending a suit in a distant foreign territory and submitting its dispute to a foreign system; the convenience to the plaintiff of litigating in the foreign state; the interest of the forum in the dispute; the efficient resolution and the advancement of substantive policies of other nations; and the extent to which the defendant does business in that state.

Theories of Recovery

If jurisdiction is found, a defendant must then understand the means by which a plaintiff may sue to collect damages. There are several possible theories of recovery available under modern products liability law. These include: (1) strict liability, (2) negligence, and (3) breach of warranty.

(1) Strict Liability

The theory of strict liability is set forth in the Restatement of Torts, an authoritative compilation of tort law (law of wrongs) in the United States. Under the Restatement Second of Torts, , one who sells any product in a defective condition that is unreasonably dangerous to the user is liable for resulting physical harm to the ultimate user of the product. The Restatement Second of Torts section 402A sets forth the rule as follows:

A product may also be defective in design, meaning that it was manufactured as intended, but the inherent characteristics of the product cause injury when it is used as intended. Under Restatement Second of Torts section 402A, the defectiveness of a product's design is tested by measuring it against consumer expectations. A product is defective if it is in a condition not contemplated by the ultimate purchaser and which is unreasonably dangerous to him.

(2) Negligence

A lawsuit alleging negligence was once the traditional means of establishing the tort liability of the manufacturer of a defective product. With the development of causes of action for strict liability and breach of warranty, however, negligence is no longer the principal basis for imposing product liability. Nonetheless, a plaintiff will usually attempt to prove negligence to help ensure an award of judgment in his favor.

The law of negligence is based on the premise that persons and entities should be held to a standard of "reasonable care" as to their actions. Under the "common law" (law established in past cases) a manufacturer is required to exercise reasonable care in the design and manufacture of its products. The answer to what constitutes "reasonable care" in the design and manufacture of a product depends upon the nature and risk of the harm that can be caused by the product. The Restatement contains the following explanatory comment:

Many states permit or require a court to adopt as the standard of reasonable care any statute or administrative regulation if it was intended to protect persons in the plaintiff's position from the kind of hazard and harm suffered. A defendant's violation of the statute or regulation is taken as conclusive proof of a failure to exercise reasonable care. However, in some states a violation of law constitutes only prima facie evidence of negligence which the defendant can seek to rebut by proving that it acted reasonably under the circumstances.

(3) Breach of Warranty

Another theory of liability available to plaintiffs is breach of warranty. To prevail in a breach of warranty action, the plaintiff need only demonstrate that a warranty existed, that the seller breached the warranty, and that the breach was the proximate cause of the loss.

A manufacturer's warranties concerning a product can be express or implied. Uniform Commercial Code section 2-313 provides that an express warranty is created by "[a]ny affirmation of fact or promise made by the seller to the buyer which relates to the goods and becomes part of the basis of the bargain."

Implied warranties, in contrast, are not based on the guarantees or representations of the manufacturer, but are implied by law from the fact that a sale has occurred. One common implied warranty is the warranty of merchantability. Under Uniform Commercial Code section 2-314, all products sold by a manufacturer who is a merchant dealing in goods of that kind are automatically warranted to be merchantable-that is that they are able to pass without objection in the trade, fit for ordinary purposes for which such goods are used, and conforming to promises or affirmations of fact made on containers or labels.

Another implied warranty is the warranty of fitness for a particular purpose. When a seller knows of a particular purpose of a buyer, who is relying on the seller's skill and judgment, Uniform Commercial Code section 2-315 provides that there is an implied warranty that the goods will be fit for the particular purpose.

As with strict liability, an action for breach of warranty under the Uniform Commercial Code is viable even if a manufacturer has exercised the utmost care in the preparation of its product.

Defenses

There are many defenses available to a defendant in a products liability action. In some cases, a statute of limitations defense may be available because almost all states provide a limit on the time in which a case may be brought for personal injuries. The time limits can be as short as one year, but are most often two to three years.

Generally, the time for bringing a claim begins to run from the time of injury. A number of states, however, apply a "discovery rule" providing that the statute of limitations runs, not necessarily from the time of injury, but from the time when the plaintiff knows or should know of his claim. In states with a discovery rule, it is more difficult to determine when the statute of limitations applies in a particular case.

Under section 402A of the Restatement Second of Torts, a product is neither defective nor unreasonably dangerous when it is used abnormally, meaning when it is used in a manner not foreseeable by the manufacturer of the product. Thus, it may be a defense to a product liability action that the plaintiff misused the product. In a minority of states, a plaintiff's contributory fault is a complete defense to a negligence claim. (The plaintiff may be barred from recovery in this situation because he or she "assumed the risk" of injury by misusing the product.) However, most states have adopted some form of comparative fault scheme in which the plaintiff's recovery is reduced by the plaintiff's percentage of fault (although in many states recovery may be defeated if the plaintiff's fault is greater than 50 percent.)

In the case of an express warranty, the terms of the warranty control and the product-related defenses available in strict liability or negligence are not available. Even product misuse or contributory negligence is not a defense if it is warranted that the product can be misused in a particular way.

With respect to an implied warranty, the situation is somewhat more complicated. In the case of an injured consumer, many courts treat a warranty action as one for strict liability and permit the same defenses as were discussed above, such as assumption of risk.

Damages

There are three general types of damages that may be claimed by a plaintiff in a products liability action: nominal damages, compensatory damages, and punitive or exemplary damages.

Although the principal object of damages is compensation for injuries suffered, in some situations nominal damages, a trivial sum, may be recovered where a cause of action is proved but no substantial damage is shown. The advantages of such an award to a plaintiff, other than psychological, are two: (1) the plaintiff is entitled to costs of suit; and (2) he may be entitled to punitive damages. It is a fundamental principal that a negligent act does not give rise to liability without damage; hence, where no actual injury has occurred, nominal damages are not recoverable.

There are two types of compensatory damages available, general damages and special damages. General damages are those which necessarily or usually result from particular wrongful acts and the mere statement of the cause of action for the injury sufficiently implies that such damages resulted. Special damages are those which are not considered to be so necessary or usual a result, and specific notice is required when they are claimed.

Recoverable damages include medical bills, economic value of lost earnings over expected lifetime, amounts for pain and suffering, a spouse's derivative claim for loss of consortium, and, in some states, other family members, derivative claim of lost companionship. It is important to note that some states limit the amount of damages that can be collected in certain types of cases. Other states, however, have no such laws and the amount of damages recoverable is limited only by the judge's or jury's imagination.

While the basic principal of damages is compensation, additional damages may be given in actions where the defendant's conduct has been outrageous, for the purpose of punishing him and deterring him and others from such conduct in the future. These damages, called "punitive damages," may be awarded for conduct that is outrageous, because of the defendant's evil motive or his reckless indifference to the rights of others.

Punitive damages may be awarded even though there is no substantial pecuniary or physical harm; meaning, a cause of action must be shown but an award of nominal damages is enough to support a further award of punitive damages where the tort is committed for an outrageous purpose. In considering the amount of damages, the court or jury may consider not merely the act itself but all the circumstances, including the motive of the wrongdoer, the relations between the parties, the provocation or want of provocation for the act, and the wealth of the defendant.

Enforcement of a Judgment

The final issue to consider is whether a judgment in an American court may be enforced against a foreign defendant. United States law provides that if the foreign defendant has a U.S. subsidiary, and there is a judgment against the foreign parent corporation, a court may seize the assets of the subsidiary in order to satisfy the judgment against the foreign defendant. The ability of an American court to enforce a judgment directly against a foreign defendant depends upon the existence or nonexistence of any treaties and the laws of the foreign defendant's country.

It is also possible that liability may be "joint and several," meaning that if all or several defendants in a case are found to be liable, each and every one of them is liable for the entire amount of the judgment. If the plaintiff can satisfy the judgment by receiving payment of the entire judgment from just one of the defendants, that defendant may then have a cause of action against each of the other defendants for "contribution" of an amount attributable to each of the other's liability. In this situation and depending on the amount of money involved, it may be wise, for the sake of preserving good business relationships, for the defendant to pay a judgment also involving one of its customers despite the fact that a U.S. court may not be able to enforce judgment against the foreign defendant.

Final Thoughts

The dramatic increase in international trade has resulted in the export of a multitude of products to the United States by foreign companies. These companies are increasingly being brought into United States courts as a result of allegations of product defects resulting in injuries to American consumers. Foreign companies should be aware of all laws and regulations applicable to their products so as to prevent any possible violations of law and to be able to react knowledgeably and decisively if brought into any legal action.