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Module 07
Business Torts and Product Liability
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Learning Objectives
Upon successful completion, the student will be able to:
Compare costs of torts;
Analyze torts particular to business;
Identify Fraud;
Identify Intentional misrepresentation.
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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.”
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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.
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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
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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
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Intentional Misrepresentation or Fraud
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
Scienter or intent to defraud
Intentionally misleading and deceiving another
Person knows or has reason to know that statement being made is
false
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Intentional Misrepresentation or Fraud (2)
Recipient of false information justifiably relies on the information and
decides to enter into the deal
Privity between the parties – relationship exists
Proximate Cause – logical link between reliance on misstatement
and losses suffered by the plaintiff
Damages
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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.
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Yazdianpour V. Safeblood Technologies, INC. (2)
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.
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.
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Yazdianpour v. Safeblood Technologies, Inc. (3)
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.
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Interference With Contracts
Known also as
Interference With Business Relations or
Interference With Contractual Relations
When breaking a contract will benefit a 3rd party:
Existence of a contractual relationship
3rd party knows about the contract
3rd party intentionally induces of breach of contract or interferes with the
contractual relationship.
Absence of justification for the interference
Damages as a result of the interference
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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
Predatory behavior, not “merely competitive”
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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.”
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Hamby v. Health Management Associates (2)
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.
Appeals court reversed and remanded.
HELD: Trial court abused discretion in dismissing tortious
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Hamby v. Health Management Associates
Intentional interference occurs when:
Existence of valid contractual relationship or business expectancy
Knowledge of relationship or expectancy
Intentional interference, inducing or causing breach or termination of
relationship or expectancy
Resulting damage to party whose relationship has been disrupted.
Hamby may be able to prove these elements at trial.
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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
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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
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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.
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MacPherson v. Buick Motor Company
(1916 landmark case) (2)
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.
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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.
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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
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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.
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Baxter v. Ford Motor Company (1932 case) (2)
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.
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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.
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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.
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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.
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Primary Areas of Product Liability Law
Key Areas of Cases:
Defect in product from manufacturing
Manufacturer failed to warn consumer of risks of use or of known
hazards in certain uses of product.
Product had design defect that could have been avoided by alternative
design
Product resulted in latent injuries that may not become known for years.
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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.
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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
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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
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Parish v. ICON (2)
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.
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Parish v. ICON (3)
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.
Testing and Material (ASTM).
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Parish v. ICON (4)
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.
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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.
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Kim v. Toyota Motor Corporation (2)
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”
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Kim v. Toyota Motor Corporation (3)
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.
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Kim v. Toyota Motor Corporation (4)
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 riskbenefit 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.
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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.
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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.
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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.
Ex: Air Force employees who handled certain chemicals – have a knowledgeable
staff.
Some statutory limits exist.
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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
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THE END
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