Product Liability in the USA
By Aaron N. Wise, Attorney at Law © 2009
• Proper Perspective of the Risk. Do you have a realistic, informed view of the product liability risk in the USA as it applies to your particular goods? Or do you have an unrealistic, exaggerated, media-influenced viewpoint? While there is a product liability risk for many foreign firms, it will normally be manageable if you adopt certain measures. In short, if you are concerned about product liability, educate yourself about the risk and what you can do to reduce and manage it. An unwarranted “knee-jerk” reaction shouldn’t frighten you away from the U.S. market.
In the opinion of this practicing American lawyer (Mr. Wise) and many other knowledgeable American lawyers, these concerns are typically exaggerated, blown out of proportion, and do not reflect the realities. American product liability judgments awarding irrational, exorbitant damages ---including ones that seem to impose liability for no good reason----are very rare. These rarities are, however, fodder for the media.
You should be aware of the recent, major trend beginning several years before and extending through George W. Bush’s two terms in office, of reforming the American product liability legal regime. These developments are definitely pro-business and quite significant, for manufacturers, sellers and others in the chain of bringing products and goods to the market. That includes foreign ones, their US subsidiaries and joint venture entities.
These developments are explained in the author’s publication, “American Product Liability: ‘Good News for Business!’ Recent Trends and Developments---a Guide for Foreign Companies”. Its Table of Contents is set out in this Chapter’s Annex.
• Who Can Be Sued? Who Can Be Liable? Stated in a general way, anyone who designs, manufactures, sells, distributes, or renders services in connection with a product, or component or part thereof, can incur product liability in the USA. That may include a licensor of technology used to produce the item or of a trademark or brand name (if the product is marketed with that mark or name). A plaintiff often tries to sue all parties in the distribution chain. That does not mean, however, that the plaintiff will succeed against all of them, or succeed at all.
• Important Jurisdictional Point: Your Company May Not Be Subject to the Jurisdictional Reach of the Particular U.S. Court in Which a Product Liability Suit Is, or May Be, Brought. You may at least have a good legal argument supporting that point and that in itself may deter the plaintiff from suing or continuing suit. That may apply even if you have a U.S. subsidiary or affiliate engaged in the sales or distribution process. We use the word “may” intentionally--the preceding three sentences will not necessary apply to all foreign parties in each and every instance. But they probably will apply to a considerable number. For more information about this very important point, you might consult the author’s guide “American Product Liability: ‘Good News for Business!’….” mentioned above.
• Passing and Reducing Risk by Contract. A significant part of your product liability risk can, by contract, be passed on to your U.S. customer, distributor, dealer, licensee or joint venture partner, and be reduced in other ways by contract. Even properly drafted and implemented “General Terms of Sale” tailored to the U.S. market can reduce your risk.
• Another Liability Area. Liability can arise when your buyer, typically a legal entity, allegedly sustains losses and damages as a result of defects in or deficiencies of your products, equipment, etc. Damages due to your unexcused late delivery might also come into play. The alleged damages might include your customer’s plant down time, lost profits, other economic damages, penalties your buyer might incur to third parties, and other possible direct and consequential damages. The plaintiff might also attempt to claim punitive damages. The risks associated with this type of liability can be very substantially reduced by including or not including certain provisions in the contract with your buyer. The term “contract” can also include “General Terms of Sale”-see the preceding point.
• Non-U.S. Contract Documents Probably Won’t Do The Trick. You should not assume that contract documents prepared according to foreign (non-US) law or in any manner other than by competent U.S. counsel will accomplish the goal of reducing and helping manage the U.S. product liability risk. The likelihood is that they will not.
• Product Liability Insurance. You should seriously explore the possibility of purchasing product liability insurance and commercial risk insurance for the U.S. (and possibly Canadian) market in appropriate amounts. You should normally require your U.S. contract partner (e.g., distributor, licensee) to carry and maintain an acceptable level of product liability insurance covering the goods you sell to that partner. Sometimes, it makes sense to try to convince your U.S. contract partner (e.g., distributor, licensee, joint venture partner) to include you as a co-insured under its policy or policies, with you reimbursing the U.S. side for the additional premiums. Even with reasonably good insurance coverage, it will normally be prudent to consider implementing various other measures designed to reduce the risk.
• If You Are Sued or Suit is Threatened. If you are contacted by a plaintiff (actual or potential) or the plaintiff’s lawyer regarding an actual or potential product liability suit against you, do not reply, orally or in writing. Rather, you should contact your U.S. lawyer, who will advise you what to do. Sometimes, your lawyer will prepare a reply for you to make. Not infrequently, the lawyer for the potential plaintiff will send you and request that you sign and return a document by which you waive service of process or allow service of process to be made upon you by a simplified route (e.g., mail). You should not comply, for normally, the plaintiff, in order to effect valid service of process against a foreign company, will have to go through a tedious, formal procedure that can take several months. The fact that the plaintiff may have filed a Complaint with a particular American court does not mean the court has obtained jurisdiction over you----as one element, the plaintiff must effect a legally valid service of process against you and file proof of that with the court.