CHAP 7

BUSINESS TORTS and PRODUCT LIABILITY

Chapter 7

Meiners, Ringleb and Edwards

The Legal Environment of Business, 13th Edition

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Torts in the Business Setting

• There is no such thing as a “business tort.”

• By definition, this means torts that concern businesses. A major issue for most businesses.

• Often cases with businesses are settled out of court.

• There are often big awards, as plaintiffs view businesses as “deep pockets.”

Categories of Business Torts

Types of Torts  Intentional

 Negligence

 Strict Liability

 Torts are traditionally common law but increasingly, statutes are playing an important role in this area.

Torts Particular To Businesses

Fraud or Intentional Misrepresentation Interference With Contract Interference With Prospective Advantage Product Liability Consumer Products & Negligence Strict Liability for Products Ultrahazardous Activities

Fraud • Deliberate Deception • The tort may be called fraud, misrepresentation, fraudulent

misrepresentation, or deceit • Intentional Misrepresentation or Fraud

• Relationship of parties is a factor in creating legal duties “Malice, intent, knowledge and other conditions of a person’s

mind may be alleged generally” when claiming fraud (Rule 9b, Federal Rules of Civil Procedure)

• Claim often added to a suit of breach of contract

Intentional Misrepresentation or Fraud • #1 Misstatement of an important or material fact

• Misstatement induces another to enter into a business relationship • Unrelated or unimportant misstatement cannot be a basis of fraud, i.e.

hyping a product

• #2 Scienter or intent to defraud • Intentionally 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 decides to enter into the deal

• #5 Privity between the parties – relationship exists

• #6 Proximate Cause – logical link between reliance on misstatement and losses suffered by the plaintiff

• # 7 Damages

YAZDIANPOUR V. SAFEBLOOD TECHNOLOGIES, INC.

• Yazdianpour and Faisal Ali Mousa al Naqbi entered in to licensing agreement with Safeblood, owned by Worden.

• Bought exclusive rights to market patented technologies overseas • Worden told licensees that patents were marketed by another

company in U.S., but they would have exclusive rights otherwise. • Worden knew he missed deadline for his U.S. patents to be

eligible for protection in other countries. • Foreign licensing rights were worthless. • Plaintiffs, did not know truth of patents’ legal status.

Learned later they could not register them in other countries. • Sued Safeblood and Worden for fraud. • District Court: Dismissed claim. Plaintiffs appealed.

Cont.

Yazdianpour v. Safeblood Technologies, Inc. continued

• HELD: Reversed dismissal of fraud claim. Remanded to District Trial Court for trial.

• Plaintiff required to investigate a misrepresentation only when obvious problem may exist.

• Requirement to investigate: Only when “facts should be apparent . . . or . . . have [been] discovered.”

• Even if plaintiffs could check status of patent with USPTO website, not required to investigate unless obvious they were were being deceived.

• Worden knew the status of the patents overseas But executed an agreement nevertheless.

Interference With Contracts

 Known also as • Interference With Business Relations or • Interference With Contractual Relations

• When breaking a contract will benefit a 3rd party: • 1. Existence of a contractual relationship • 2. 3rd party knows about the contract • 3. 3rd party intentionally induces of breach of

contract or interferes with the contractual relationship.

• 4. Absence of justification for the interference • 5. Damages as a result of the interference

Interference With Prospective Advantage

• Similar tort is known also as • Interference With Prospective Economic Advantage or • Interference With Prospective Contractual Relationship

• One party makes it difficult/impossible for another party to continue in some/all business dealings

• A business attempts to improve its place in the market by interfering with another’s business

• Unreasonable, improper manner of interference • Predatory behavior, not “merely competitive”

Hamby v. Health Management Associates

• Health Management Associates (HMA) contracted with Emcare to provide emergency room (ER) staff at a hospital.

• Emcare hired Dr. Hamby for ER on one-year contract. • CEO of HMA demanded financial improvements. Emcare chastised

physicians for missing opportunities to order more billable testing. Hamby’s patient charts were reviewed. • Head of hospital wrote to HMA: “We continue to have issues

with low ER metrics from Dr. Hamby . . . . Please send me your plan for how this will be resolved.”

• Emcare soon fired Hamby. • He sued HMA, Emcare, and others for tortious interference with

employment contract. Said he was fired before contract was up for refusing to run up patient bills.

• Trial Court: Dismissed suit. Hamby appealed.

Hamby v. Health Management Associates

• Appeals court reversed and remanded. • HELD: Trial court abused discretion in dismissing tortious interference

claim. • Intentional interference occurs when: • 1) Existence of valid contractual relationship or business expectancy • 2) Knowledge of relationship or expectancy • 3) Intentional interference, inducing or causing breach or termination of

relationship or expectancy • 4) Resulting damage to party whose relationship has been disrupted. • Hamby may be able to prove these elements at trial.

Product Liability Liability of producers of defective products

Want companies to have incentives to ensure their products are safe.

But do not want companies to pay for injuries consumers suffer while using products improperly.

Product liability is a general term that is based primarily in tort law

However, elements of contract law come into play

Consumer Products and Negligence

In the 19th century courts, there was the privity of contract requirement – a contractual relationship between injured party with the manufacturer was needed

Privity usually not present, so burden on consumer

If no privity, caveat emptor applied – “Let the buyer beware”

This changed with MacPherson v. Buick Motor

MacPherson v. Buick Motor Company (1916 landmark case)

 Buick sold cars to dealers.  NY dealer sold car to MacPherson.  Wheels made by another company; wheel collapsed, causing accident

that resulted in injury.  MacPherson filed a negligence suit; Buick says it has no privity with

MacPherson; trial court holds that privity is not required; MacPherson wins. Buick appealed.

 NY high court held that manufacturer has primary control over product design and safety.

 Defects could have been discovered by reasonable inspection, which was omitted.

 Buick is responsible for the finished product.  Judgment affirmed. Tort liability based on negligence of maker becomes

the standard. Adopted nationwide over time.

Negligence in Tort Manufacturer must exercise reasonable care under the circumstances.

 Failure to inspect or test materials used in the product can be negligence

Were the dangers foreseeable?

Care must be taken to avoid misrepresentation in product promotion.

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 even if no negligence.

Strict Liability under Contract Law

Implied Warranty Implied warranty of safety at common law: Began with food Safety Implied AT LAW – whether the manufacturer wants to warrant the product or not From UCC: Implied Warranty of Merchantability Implied Warranty of Fitness for a Particular Purpose

Express Warranty Guarantee of safety or performance By model By statement By contract By advertising Misrepresentation of product safety may be basis of strict liability

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. Not shatterproof – Baxter loses an eye.

• Trial court did not allow advertising to be admitted into evidence; said there was no privity of contract.

• Baxter appealed.

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 products The 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 Moves to Tort Law – Greenman v. Yuba Power (1963)

• Wife buys husband power tool. • Due to defect, two years later wood flies out of the machine,

striking Greenman’s 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. Standard adopted in Section 402A of Restatement (Second) of Tort.

Restatement (Third) of Torts on Products Liability

• The American Law Institute (ALI) definition of strict liability in Sec. 402A of the Restatement (Second) of Torts adopted by most states. ALI wrote a new standard for product defect in Restatement (Third) of Torts.

• State supreme courts consider the new concepts of law and often gradually adopt it.

• Restatement (Third) of Torts defines categories of defect in §2 concerning (a) product departing from intended design, (b) foreseeable risk of harm could be reduced or avoided by an alternative design, or (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.

Primary Areas of Product Liability Law

Key Areas of Cases:

1) Defect in product from manufacturing 2) Manufacturer failed to warn consumer of risks of use or of

known hazards in certain uses of product. 3) Product had design defect that could have been avoided by

alternative design 4) Product resulted in latent injuries that may not become known

for years.

Manufacturing Defect

• Straightforward. Liability is imposed when product comes off assembly line with defect that causes danger.

• Consumers do not expect such defects – consumer expectation test. Producers know such cases are difficult to contest. So cases usually settled.

• Problem for consumer—product comes from maker in another country with few assets.

Failure To Warn

Failure by manufacturer to warn of dangers in using a product

 Includes a wide variety of circumstances  Failure to give information about specific dangers  Failure to issue added warnings about problems that become known

after product has been in use  Failure to give special emphasis on biggest dangers

Parish v. ICON • Parish was jumping on a backyard trampoline made by Jumpking. • Surrounded by a safety net made by ICON • He did a back somersault, landed on his head, rendered

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. • 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; only1 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

Parish v. ICON, cont.

• Warning on each of 8 legs of trampoline – designed so warnings face out, visible to user.

• Jumpking sewed 2 printed warnings onto the trampoline bed. • Warning placard for the owner to affix to the trampoline – both

pictorial warning and language re: safe use of trampoline. • Owner’s manual contains warnings found on trampoline, plus

added warnings about supervision and educational instruction. • Warnings exceed the requirements of the American Society for

Testing and Material (ASTM). • Warnings are also provided with safety net, which has separate

owner’s manual. • Restatement says users must pay some attention for their own

safety. • Consumers must “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 were adequate.

Kim v. Toyota Motor Corporation • Kim driving 2005 Toyota Tundra pickup on wet, curvy road at 5o mph. • Said car driving toward him crossed over center line. He swerved to avoid the

vehicle. Right tires went off the road on to shoulder. • Tried to regain control by turning back on the road. Truck went off road and rolled

over. He suffered serious injuries. • Sued Toyota for design defect: Truck lacked electronic stability control (ESC) a/k/a

as vehicle stability control (VSC). • Feature would have increased a chance of regaining control of truck. • Not standard equipment on vehicles at that time. • Trial Court: Found for Toyota. Kim appealed. Decision affirmed. • California has set out two alternative tests to identify design defect. Consumer Expectation Test: Product has design defect if product fails to

perform as safely as ordinary consumer would expect. Risk-Benefit Test: Plaintiff must show evidence that design is proximate cause

plaintiff’s injuries. • Burden shifts to defendant to prove “the benefits of the challenged design

outweigh the risk of danger inherent in such a design” Continued

Kim v. Toyota Motor Corporation continued • Trier of fact may consider: Gravity of the danger by the challenged design The likelihood that such danger would occur The likelihood that such danger would occur The mechanical feasibility of a safer alternative design Financial cost of improved design Adverse consequences to product & consumer that would result from

an alternative design. • Issue: Whether trier of fact may consider evidence of industry custom and

practice in the risk-benefit analysis. Yes, it is appropriate to consider compliance with industry standard in risk-benefit analysis.

• Held: Risk-benefit balancing was appropriate in strict product liability cases. State of art at the time of product’s manufacture is admissible in strict products liability failure to warn cases.

Strict Liability and Unknown Hazards or Latent Defects

• Dangers not known at the time of the product’s manufacture.

• Hazard associated with the product is not learned for many years.

• Consumer Expectation standard used by courts

• What is the expectation of an ordinary customer regarding safety of a product?

• Claims are often class action suits.

• Asbestos Industry – has paid tens of billions of dollars to tens of thousands of plaintiffs in claims over decades.

• Manufacturers must have recalls or warnings when hazard is detected.

Joint and Several Liability Most 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 amounts of damages.

Any of the defendant-manufacturers may be held responsible for all damages.

Limits put on application of joint & several liability in some areas (i.e. medical malpractice) in some states.

Defenses To Negligence and Strict Liability

• Product Misuse or Abuse • Assumption of Risk

• Tobacco and alcohol use are controversial areas; legal products that are unavoidably dangerous.

• Sophisticated User Defense and Bulk Supplier Doctrine • Usually in business settings • Bulk supplier does not have to police details of what is done as

product continues down the chain, as bulk products go to producers.

• Sophisticated user or Knowledgeable purchaser is one who “reasonably should know of the product’s dangers” e.g. another manufacturer.

• Ex: Air Force employees who handled certain chemicals – have a knowledgeable staff.

• Some statutory limits exist.

Ultrahazardous Activity Abnormally Dangerous Activity

Common law rules developed about uncommon activities where utmost care is needed  i.e. use of explosives, transport of

dangerous chemicals, crop dusting, etc.  Kansas Case: Groundwater contamination

from oil refinery