Product Safety, Legal Dimensions, and Consumer Conduct

1. Product Safety, Legal Dimensions, and Consumer Conduct Jennifer Sawayda Program Specialist Anderson School of Management University of New Mexico Albuquerque, NM

2. Before We Begin…. Some Points to Consider It is a mistake to think that product safety is only a concern in manufacturing. In fact, advertisers, salespeople, suppliers, manufacturers, and anyone else who occupies a marketing function should make product safety a high priority.

3. Who Determines Whether a Product is Unsafe? You might be tempted to say the courts, but actually it is the consumer! In litigation cases, consumer surveys are often administered to determine the extent of the defendant’s liability. This is important because community awareness or the behavior of a reasonable person in a product safety situation will determine the extent of the company’s liability for the injury.

4. Negligence • A violation of the responsibility to protect others from unreasonable risk. In determining whether an act was negligent, courts look at whether an ordinary person would have committed the same act. • A manufacturer has three main duties: • Inspect and test • Anticipate the target market • Provide adequate warning labels • The Ford Pinto case

5. Strict Liability This occurs when a company sells a product considered to be unreasonably dangerous even though the seller took all possible care in selling and preparing the product (Restatement (Second) of Torts1965). Focused on the product rather than the behavior Forseeabilityand adequate warning labels Note: In both negligence and strict liability cases, the users must have been harmed by the defective product.

6. Is the Company Always at Fault? • No! There are four defenses that have been used in product liability cases: • Contributory Negligence • Assumption of Risk • Misuse • Comparative Fault • While proving that the consumer was at fault does not always exonerate the company, it often reduces the damages awarded to plaintiffs.

7. Revisiting the Importance of Consumer Research • Research to understand how consumers use or perceive products is important because, among other things, it allows courts to determine: • how an ordinary person might use a product, helping to determine the reasonableness dimension • community awareness about the risks of certain products, helping to determine overall consumer awareness of risks • how consumers perceive elements of warning labels, helping to determine the effectiveness of warning labels • Companies can use consumer feedback to develop product defect prevention programs. Firms can also more effectively manage damage control and correct defects discovered after the sale.

8. Advertising’s Role in Product Safety • A company may be held liable if its advertising misrepresented a product to the extent that it caused consumer injury. • The consumer must rely upon the information gleaned from the advertisement. • Again, the concept of reasonableness is important. • If the advertisement made such an exaggerated claim that a reasonable person would not take it seriously, then the company might not be held liable.

9. Advertising’s Role in Product Safety • Another requirement is that there must be a causal relationship between the advertisement and the action resulting in injury. • In other words, the advertisement must have directly caused the subsequent injury. • Determining liability as a result of product advertising can fall under four legal categories: • Warranties • Misrepresentation • Negligence • Strict liability

10. Warranties • Express Warranties: Statements that cause consumers to form expectations about a product’s function, safety, and/or quality. • When ads convey promises about a product that becomes the basis of a bargain between buyer and seller, it is an express warranty. • Implied Warranties: Presumed expectations about a product’s function, safety, and/or quality. • For example, because consumers tend to associate high-quality with safety, ads touting a high-quality product might be implying that the product is safe.

11. Misrepresentation • When an advertisement convinces a consumer to act (or refrain from acting) based upon incorrect information in the advertisement. • There are different types of misrepresentation: • Inadvertent (non-intentional and non-negligent) • Negligent (careless but not intentional) • Intentional (knowingly deceptive) • A good example is deceptive advertising concerning mortgages

12. Negligence and Strict Liability When injury occurs because a consumer relied on an advertisement, and the content of the advertisement violates the company’s responsibilities for consumer safety, the company’s advertising is deemed to be negligent. Strict liability applies when an advertisement’s content leads to unreasonable risks, even if the company takes pains to exercise due care in its advertising and product quality.

13. Guarding Against Advertising Product Liability Issues Proactively work to make sure that marketers are not misrepresenting products in order to convince consumers to purchase Check copy to determine the different meanings the content might convey, and see how these meanings differ from what is intended. Make sure claims about the product can be substantiated. Keep claims that cannot be substantiated general.

14. Liability of Salespeople Statements Too often sales managers evaluate a salesperson based on performance. However, this can be problematic if the salesperson made statements or used techniques that misrepresented the product. Common ways that salespeople might mislead customers about the product’s quality or performance include exaggerated statements, misleading promotional materials, and even not answering the client’s questions.

15. Five Potential Legal Issues Creation of unintended warranties Dilution of warning effectiveness Disparagement of competitive offerings Misrepresentation of own offerings Tortious interference with business relationships

16. Unintended Warranty Issues Occurs when a salesperson’s statements or presentation leads the customer to form certain expectations of the product Usually an inadvertent form of misrepresentation A casual salesperson statement or even photos in a brochure can create an express or implied warranty Even if sales materials or contracts contradict statements by the salesperson, the company can still be held liable if the client relied on the salesperson’s information Implied warranties are assumed if the salesperson does not inform the client about the potential risks of the product Puffery, or exaggerated claims, is not as tolerated when it comes to personal selling

17. Dilution of Warning Effectiveness • A firm can be held liable for injuries resulting from products with sufficient warning labels if the salesperson diluted these warnings during presentations • Common ways of diluting warning effectiveness include: • Verbally downplaying the risks of the product • Telling the client he or she does not have to read the warnings • Failing to warn an industry (such as the medical profession) about the dangers of product misuse

18. Disparagement of Competitive Offerings • This could lead to liability if the salesperson knowingly makes a false statement about a competitor’s product • Intended to dissuade the client not to do business with the competitor • While it is acceptable to present an opinion about a competing product, an untrue statement posing as fact can be considered trade libel • Opinion: saying that your product is better than a competitor’s would likely be seen as an opinion. • Fact: saying that independent studies have confirmed that your product performs 20% better than your competitor’s

19. Misrepresentation of Own Offerings • Innocent misrepresentations or fraud • A salesperson who believes a claim he or she makes is true can still create product liability for the company • Customer must only prove that he relied on the false claim • Intentionally making untruthful claims about a product can not only create product liability, but can also lead to claims of actionable fraud • Scott v. Mid-Carolina Homes (1987) • Intentional misrepresentation that causes injury often results in punitive as well as compensatory damages to punish the firm

20. Tortious Interference • “Dirty tricks” the salesperson uses to obtain business unfairly in a way that damages other firms • Leigh Furniture v. Isom (1982) • Sales representatives from Leigh harassed Isom with false accusations, contributing to the firm’s bankruptcy • Because these actions are intentional, companies found guilty of tortious interference pay both compensatory and punitive damages

21. How Should Managers Guard Against Sales Force Product Liability Issues? • Training • Training programs and tools such as role-play programs can help salespeople better understand the consequences of behavior as well as ways that clients may interpret their statements or actions. • Compensation • Rather than rewarding simply for making the numbers, managers should also look at other behavior-based performance indicators, such as positive customer feedback or lower complaints. • Feedback from customers • Feedback can help managers assess salesperson behavior as well as make the salesperson aware of areas for improvement. • Model appropriate behavior • Sales managers should be sure to model appropriate behavior for subordinates. • Codes of Ethics • Codes of ethics can be used to provide guidelines on appropriate and inappropriate conduct.

22. Adapted from Karl A. Boedecker, Fred W. Morgan, & Jeffery J. Stoltman (1991). “Legal Dimensions of Salespersons’ Statements: A Review and Managerial Suggestions.” Journal of Marketing 55, pp. 70-80.

23. Product Liability of Component Part Suppliers • The precedent has been to hold the marketers of finished goods responsible for injuries rather than component parts suppliers. • Wetz v. Zapata Off-Shore (1970) • Component part suppliers not generally found liable if: • Component is a standardized item that is usually safe • Components were not designed for that specific use • Components were adapted later on down the supply chain • Harm came from the specialized end use of the component, but not the component itself

24. Arguments for No or Limited Liability Component parts suppliers cannot anticipate all the uses their components will be used for. Finished parts suppliers are generally considered to have the best chance in the marketing supply chain to control for potential dangers of the product.

25. When Liability Does Occur The component parts supplier supplies all the parts of a product. The supplier has prior knowledge that the parts will be used in an unsafe way. The component parts supplier is involved in the design of the finished product. The component parts supplied are frequently linked with injury. The component itself is defective and causes harm or renders the product unsafe.

26. Vertical Enterprise Liability The exemptions that component parts suppliers have for product liability might change under vertical enterprise liability. This holds the entire supply chain potentially liable, which could make component parts suppliers more responsible for the safety of their components. Vertical enterprise liability has been applied to franchisors, independent contractors, and used goods sellers. Component parts suppliers should therefore take actions to protect against liability.

27. How to Protect Against Product Liability Issues? • While component parts suppliers that provide parts for a wide variety of uses cannot anticipate all of the ways they might be used, this defense is harder for suppliers with few uses of their components. • Therefore, these suppliers must carefully monitor the safety risks of the components they provide. • Duty to Warn! Providing warnings about potential risks can significantly reduce the likelihood that a component parts supplier will be held liable for product defects or harm.

28. Conclusions • To protect from product liability issues, marketers, manufacturers, and suppliers should: • Inspect and test products and product parts • Anticipate how the product will be used • Provide adequate warning labels about potential dangers • Exert caution when providing statements or promotions that might provide express or implied warranties • Check advertising copy for misleading or confusing claims that could cause people to rely on erroneous product information

29. Conclusions Train salespeople to avoid making statements or presentations that could mislead consumers about a product’s quality or functionality Train salespeople to provide adequate warnings, especially if they realize the client is planning to use the product in ways not intended Avoid making claims that cannot be verified or substantiated Monitor the safety record and safety risks of the products being supplied to customers