BUSINESS TORTS and PRODUCT LIABILITY

1. BUSINESS TORTS and PRODUCT LIABILITY Chapter 7

2. Torts in the Business Setting • There is no such thing as a “business tort”. • This just means torts that concern businesses. • Often cases with businesses are settled out of court. • There are often big awards, as plaintiffs and juries view businesses as “deep pockets”.

3. Fraud • Deliberate Deception: fraud, misrepresentation, fraudulent misrepresentation, or deceit Relationship of parties: • 1) Representation has been made knowingly • 2) Without belief in its truth, OR • 3) Recklessly and careless whether it is true or false • “Malice, intent, knowledge and other conditions of a person’s mind may be alleged generally” (Rule 9b, Federal Rules of Civil Procedure) • Claim often added to a suit of breach of contract

4. Intentional Misrepresentation or Fraud • #1 Misstatement of an important or material fact • Misstatement induces entry into business relationship • Unrelated/unimportant misstatement not a basis of fraud • #2 Scienter or intent to defraud • Intentionally misleading and deceiving another • #3 Person knows 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

5. Lightle v. Real Estate Commission • Lightle, Alaska real estate agent, listed house for sale by Leighs. • Lightle allowed two offers (Seeley & Williams) to be made on same property, telling both buyers they would get the house. • Seeley found out, rescinded offer, demanded deposit back. • Seeley filed a claim against the Alaska Real Estate Commission’s surety fund (to compensate losses in real estate due to fraud). • Commission heard case – held that Lightle committed fraudulent misrepresentation. Awarded Seeley damages. Suspended Lightle’s real estate license. Lightle appealed. • HELD: Affirmed Commission’s ruling. • Lightle told Seeley that other offer was “dead” that Seeley offer had been accepted and “the house is yours”. • Lightle failed to disclose facts that might have affected Seeley’s decision.

6. Interference with Contractual Relations Breaking the contract benefits a 3rd party 1. Existence of a contractual relationship 2. 3rd party knows about the contract 3. 3rd party intentionally interferes with the contractual relationship Interference With Prospective Economic Advantage 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” Interference With Contractual Relationsand Interference With Prospective Advantage

7. Product Liability • Liability of producers and sellers of goods re: defective products • We want companies to have incentives to ensure their products are safe. • But, we do not want companies to pay for injuries consumers suffer while using products improperly. • General term applied that deals primarily in tort law • Involves some contract law • Primarily now statutory law

8. History of Consumer Products and Negligence • In the 19th century courts, there was the privity of contract requirement – a contractual relationship with the manufacturer was needed • Burden on consumer • If there was no relationship, caveat emptor applied – ”Let the buyer beware” • This changed with MacPherson v. Buick Motor Company Let the Buyer Beware!

9. Negligence in Tort • Manufacturer 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.

10. MacPherson v. Buick Motor Company (1916 landmark case) • Buick sells cars to dealers. Dealer sells car to MacPherson. • Wheel collapses, causing accident/injury to MacPherson. • MacPherson sues for negligence; Buick says it has no privity with MacPherson; trial court holds that privity is not required; tort law applies; MacPherson wins. Appeal. • NY Ct. of Appeals holds manufacturer has primary control over product design & safety. • Defects could have been discovered by reasonable inspection, which was omitted, so Buick negligent in tort. • Buick (not dealer) is responsible for the finished product. • Judgment affirmed.

11. Implied Warranty of safety Manufactured Products Food Products Implied Warranty of Merchantability Under the UCC Implied Warranty For Fitness For A Particular Purpose Implied AT LAW – whether the manufacturer wants such a warranty for the product or not See Issue Spotter: “Understanding Product Problems” Express Warranty Guarantee of safety or performance By model By statement By contract By advertising Misrepresentation theory is used as well to create strict liability Ex: Baxter v. Ford Motor Strict Liability Created Under Contract Law

12. Baxter buys new 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. Not shatterproof. 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. Baxter v. Ford Motor Company (1932)

13. Strict Liability in Tort Law – California Changes Law: Greenman v. Yuba Power • Wife buys husband power tool. • Two years later wood flies out of machine, striking Greenman’s head. • He alleges breaches of warranties and negligence. • 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 in tort rule.

14. Strict Liability In Tort:402 A Restatement (Second) 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 to person or property? • Courts do not worry about carefulness, due care, reasonableness, etc.

15. Restatement (Third) of Torts on Products Liability • The American Law Institute’s (ALI) definition of strict liability in Section 402A of the Restatement (Second) of Torts still leading rule. • 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

16. Parish v. ICON • Parish was jumping on a backyard trampoline made by Jumpking. • Surrounded by a safety net (fun ring) made by ICON • He did a jump, landed on his head, left quadriplegic. • Sued ICON and Jumpking for failure to warn of dangers in products. • District court granted summary judgment for manufacturers; Parish appealed. • HELD: Affirmed. Warnings were adequate. • Look at reasonable instructions or warnings if foreseeable risks of using a product. Numerous warnings were 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; 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)

17. Parish v. ICON, cont. • Had nationally recognized warning symbols on the product. • 1 warning on each of 8 legs of 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 about safe use of trampoline. • Owner’s manual contains warnings found on trampoline, plus additional warning about 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 owner’s manual with added warnings. • Restatement says 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.

18. Timpte Industries v. Gish • Gish, a trucker, arrived at a plant to pick up load of fertilizer. • His truck was pulling a trailer made by Timpte; twin hopper trailer, loaded from above by a downspout that pours fertilizer into opper. • Downspout wasn’t going into position; Gish climbed on top of trailer; walked out along the top rail that is about 5” wide so he could put downspout in position to pour in fertilizer. • While on top, gust of wind blew. He fell & was severely injured. • Gish (& his workers’ compensation insurance carrier) sued for design defect. • Contended that trailer shouldn’t 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)

19. Timpte Industries v. Gish • HELD: Reversed; reinstated trial court’s judgment for Timpte. • No evidence that design rendered the trailer unreasonably dangerous. • Gish’s 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 footing • Texas courts apply risk-utility analysis. • Basis of design defect claim is if 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 can’t be done if a user standing on the top rail). • Gish did not adhere to warning. Loses lawsuit.

20. 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 billions of dollars to tens of thousands of plaintiffs in claims over a 30-year period Injuries caused by IUDs have been in the courts for years Manufacturers must have recalls or warnings when hazard is detected Strict Liability and Unknown Hazards or Latent Defects

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

22. Defenses To Negligence and Strict Liability • Product Misuse or Abuse • Assumption of Risk • Tobacco and alcohol use are controversial areas; so far courts haven’t applied the defense to users. • Sophisticated User Defense and Bulk Supplier Doctrine • Usually apply to 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 intermediary in bulk and on down. • Sophisticated user is one who “reasonably should know of the product’s dangers” e.g. another manufacturer.

23. Ultrahazardous 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. See Old Island Fumigation (in text)