Product Liability Update For Retailers: Inherit The Whirlwind

The whirlwind builds slowly starting with a phone call, claim or suit papers hitting the inbox of the risk manager or in-house counsel. The matter involves a claim that a product sold at one of the chain retail stores is defective resulting in serious injuries. However, only the retailer is the subject of the claims. From this moment pro-activity is the standard operating procedure. The claim materials must be promptly and thoroughly evaluated for the next action steps including careful review and analysis of the claims and options for claim handling, including seeking indemnity from the product manufacturer. Typically a retailer will contract for indemnity with a product manufacturer as part of its preliminary negotiations. However, there are circumstances such as manufacturer bankruptcies and spoliation where a retailer may be challenged in its attempt to tender a matter to a manufacturer or where indemnity may be unavailable leaving the retailer with defense as the only avenue.

The Basics

Product Identification

Due diligence includes fact checking and legal analysis travelling on parallel tracks. If no proof of purchase is offered with the preliminary information, fact investigation will preliminarily focus on whether the product is sold by the retailer and if so whether it is at stores in the area where the claim is being raised. Simultaneously, the most basic legal question to be answered is whether the jurisdiction in which the claim is made recognizes that a vendor of a product that it did not manufacture may be found liable for damages caused by the product. The majority of states recognize that in product liability cases "there are three potentially liable parties: the manufacturer, the wholesale distributor and the retailer of the allegedly defective product." See generally West v. Kawasaki Motors Mfg. Corp., 595 So.2d 92, 95 (Fla. 3d DCA 1992) (emphasis supplied). Practically speaking, the manufacturer is typically the main target in the case with the retailer joined as insurance or sometimes in an attempt to defeat diversity.

The Closed Container Defense

In a shrinking number of states, the "sealed/closed container" defense eliminates retailer liability for products received by the retailer in a defective condition; where the retailer did not contribute to this defective condition; and where the retailer had neither knowledge of the defective condition, nor an opportunity to inspect the product that was superior to the knowledge or opportunity of the consumer. Atkins v. American Motor Corp., 335 So.2d 134 (Ala. 1976). However, this protection is also coming under attack in the minority of states that apply it. The Alabama Supreme Court recently concluded that the sealed container defense was not applicable to the retail seller of food products in claims asserting a breach of implied warranty under the UCC. See Sparks v. Total Body Essential Nutrition, Inc., et al. (Ala. 2009).

Preserving the Evidence

After it is determined that the product involved was sold by the retailer and the manufacturer is identified, the process of reviewing the matter for tender is next step. Again here, two paths should be pursued in simultaneous fashion. Evidence preservation must be undertaken and it should be comprehensive. Among the evidence to be obtained is the contract with the manufacturer, the product itself, in-store surveillance if applicable and any records that reveal the chain of custody of the product upon its receipt by the retailer. The ever growing body of law on spoliation and the continually developing issues surrounding preservation of electronic records make preservation of evidence priority one for the retailer. The pitfalls of spoliation of evidence will be discussed in the next section.

Review of the Claim Materials

A review of the matter reveals that the claims are of the type often asserted in a product liability case.

Strict liability

This theory of recovery applies to entities within a product's distributive chain that profit from the sale or distribution of the product to the public. However, the classic theories on which the strict liability claim travels has little application to the retailer given the absence of the retailer's involvement in the design and manufacture of the product. Courts have found that a retailer may be liable based on a patent defect, but that a retailer generally does not have a duty to inspect for latent defects. Carter v. Hector Supply Co., 128 So. 2d 390 (Fla. 1961). However in circumstances where the retailer has access to information about a product defect, such as a CPSC recall, the retailer could be liable for even an allegedly latent defect.

Negligence

Similarly, the retailer of a defective product may be held liable in a negligence action only if the plaintiff can establish that the retailer had actual or implied knowledge of the defect. Marrillia v. Lyn Craft Boat Co., 271 So. 2d 204 (Fla. 2d DCA 1973).

Breach of Warranty

Breach of warranty-based product liability claims usually focus on one of three types: (1) breach of an express warranty, (2) breach of an implied warranty of merchantability, and (3) breach of an implied warranty of fitness for a particular purpose. Claims of breach of warranty typically include allegations that:

the plaintiff was a foreseeable user of the product; the product was being used in its intended manner at the time of injury; the product was sold by the retailer. Unlike with strict liability, proof of actual or implied knowledge of a defect on the part of a manufacturer or retailer is not essential to liability in an action based on implied warranty.

Breach of Contract

Typically used in a situation where the product itself is damaged it is effected by the state interpretation of the economic loss rule. Breach of contract is typically not a claim made in a suit involving a personal injury.

State and Federal Consumer Protection Claims

Statutory remedies are often provided for defects that merely render the product unusable (and hence cause economic injury) but do not cause physical injury or damage to other property; the "economic loss rule" means that strict liability is generally unavailable for products that damage only themselves. Each state has its own version of laws intended to protect consumers. These kinds of allegations are rarely raised in personal injury suits. Claims may also be made for alleged violations of the federal Consumer Protection Safety Act (CPSA).

Indemnity

Once the evidence has been secured, the analysis of the contract for the preparation of a letter to the manufacturer is set. All too often tender letters can be formulaic in style offering a minimal amount of detail and making rejection of the tender far too easy. Instead standard operating procedure should call for a detailed letter with reference to the specific terms of the contract and the allegations stating why the retailer is seeking indemnification. It is also important to note that under the concept of common law indemnity, the mere selling of a defective product by a retailer does not constitute "fault." A retailer who would be found...