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Rising Complexity Across Global Supply Chains is Exacerbating Product Liability Risks – JD Supra

Miles Mediation & Arbitration
Whether an individual is purchasing a new car, a new television, or a new kitchen appliance, the company that makes those products isn’t the only manufacturer involved. In today’s global economy, most products are made by an increasingly complex chain of manufacturers, each one responsible for a specific component. From computer chips to motors and extruded metal components, and more, the things everyone uses and takes for granted, even items assembled in the U.S., are often partially made overseas. But what happens when a product fails and results in property damage, economic loss, injury, or death? If one component fails? Who’s liable and/or negligent in these cases? And what if the company that made the faulty component is based and operates overseas? Mediation can help value-added resellers (VARs), original equipment manufacturers (OEMs), and consumers resolve disputes more amicably.
Before addressing the larger questions, it’s important to define some key terms that commonly appear in product liability cases. The common consumer perception is that everything they purchase has a single manufacturer. However, as already stated, that’s not strictly true. Most products have multiple parts and each of those parts are potentially manufactured by a separate manufacturer or original equipment manufacturer (OEM).
In most industries, an OEM is defined as a company whose products are used as parts or components in another company’s products. The latter company is the brand that sells the finished product to consumers. That company is known as the value-added reseller or VAR. However, in some industries, such as the computer and automotive industries, an OEM might also be a business that creates or buys components and incorporates them into a new product under its own name, e.g., Ford is the OEM for the parts in its vehicles and all parts are made specifically by Ford for vehicles sold under the Ford brand name.
Another type of parts supplier to be aware of is the aftermarket manufacturer. These vendors produce parts that typically aren’t made to the same standard as OEM-made parts are. The use of aftermarket parts to repair a product could invalidate a product warranty or further complicate product liability issues.
Product liability refers to the legal responsibility of a person or company involved in the manufacturing or distribution chain for economic losses, property damages or personal injuries that occur due to the purchase and employment of the manufactured product. Within the issue of product liability and the law there are two main theories to consider: negligence and strict liability.
Negligence is the oldest theory and still the primary one used in most product liability cases. The legal definition of the term according to Cornell Law School’s Legal Information Institute (LII) states that negligence is “a failure to behave with the level of care that someone of ordinary prudence would have exercised under the same circumstances. The behavior usually consists of actions but can also consist of omissions when there is some duty to act (e.g., a duty to help victims of one’s previous conduct).” To establish a prima facie case of negligence on the part of a manufacturer, four criteria must be met:
In product liability cases, a breach of duty is determined using the Hand Formula:
If B < PL, then there will be negligence liability for the defendant (in product liability, it is typically the manufacturer(s) who had the burden of taking precautions.)
B = burden of taking precautions
P = probability of loss
L = gravity of personal loss
In other words, if a manufacturer’s burden of taking precautions is less than the probability of injury multiplied by the gravity of the actual injury, then the manufacturer with the duty of taking precautions will have some negligence liability.
Strict liability refers to situations where a defendant is liable regardless of his/her intent or mental state when an action that caused harm occurred. Strict liability, not negligent liability is what’s used to determine liability in most, but not all, product cases. For product liability it means the plaintiff must prove the product in question was defective, regardless of the intent of the manufacturer or whether the manufacturer or supplier was careful during the design and manufacturing to ensure there were no defects in the final product. With strict product liability, if a product defect caused harm, then the manufacturer is liable.
There are three types of defects that can result in product liability: manufacturing defects, design defects and marketing defects (insufficient warnings and instructions).
Manufacturing defects happen when a finished product deviates from the intended design even though the manufacturer did everything possible to ensure product safety and design execution in the preparation and marketing of the product. Product liability cases involving manufacturing defects occur when there was a physical flaw in a product, or the product was damaged, incorrectly assembled or assembled in a way that didn’t comply with the original design specifications. With manufacturing defects, usually only a few items of the same type are flawed.
Typically, large VARs and OEMs have strict quality control processes to catch defects, and many industries must comply to strict safety regulations. Even with the strictest standards and laws in place, defects can be missed before a product goes to market and accidents can happen, or the defect is caught in time before they do. In those instances, the manufacturer typically issues a recall – voluntarily or by government agency or court order, e.g., when BMW voluntarily recalled over 900,000 vehicles made between 2006 and 2013 due to a manufacturing defect that created a potential fire hazard.
Design defects exist before a product is even manufactured, during the initial phases of product development, during the design process itself. With design defects, a product is designed and made according to the specifications in the design. The defect did not occur during manufacturing because the defect was in the designs for the product – in a design for a component or system, etc. Legally speaking, defects in design occur when the adoption of an alternative design could have reduced or removed the risk of harm from the product and the failure to employ the alternative design made the product unsafe. Like manufacturing defects, design flaws can also lead to product recalls and/or lawsuits, such as the class action lawsuit against Phillips continuous positive airway pressure (CPAP) machines over the use of a foam material that’s linked to potential cancer risk.
Marketing defects aren’t about false advertising but refer to flaws in product instructions and any necessary product warnings. When a defect is found in the warnings and/or instructions for a product it means that the potential risk(s) from harm could have been avoided or lessened by providing the proper, adequate instructions and warnings. It’s often difficult for a manufacturer to know how detailed they need to be in their instructions and warning about any acceptable product safety hazards, e.g., the risk of electric shock from using a hair dryer in or near water.
One of the most famous product liability cases where inadequate warnings and instructions were involved is the lawsuit brought against McDonald’s by a woman who had third degree burns on her legs that were severe enough to require skin grafts. During the trial, the defendant admitted they did not warn consumers of the risk posed by the company policy of heating coffee to higher-than-normal temperatures, 180 to 190 degrees Fahrenheit, temperatures their quality assurance manager testified were not fit for consumption and were hot enough to burn the mouths and throats of people who drank the coffee.
The laws around product liability apply to every entity in the supply chain from production to distribution. The chain includes raw material suppliers, parts and component suppliers, the manufacturer who assembles the product, the brand the product is sold under (not always the same as the manufacturer who assembled it), and in some cases the retail seller, and in the case of technology, the installer and programmer, and anyone else involved in making the item.
In some cases, a VAR or OEM (depending on the industry, these terms could refer to different or similar entities) buys the parts and materials from other manufacturers and suppliers (in some industries these manufacturers can also be called OEMs – see definitions above) who have no knowledge of the design of the product or the use of the product. These suppliers might receive some specifications, but not always, and there is no legal duty for them to ask the VAR/OEM.
In other cases, the suppliers and component parts manufacturers participate and collaborate in the design process and/or selection and integration of the part into the product that ultimately causes harm. This makes the supplier part of the VAR/OEM’s team of designers and/or engineers. This level of complexity in product liability cases can lead to disagreements between multiple companies over who is liable and/or negligent, including who knew what and when, etc.
As stated at the beginning of this article, the global economy has increased the complexity of liability issues across the supply chain even further. It’s virtually impossible to purchase many types of goods where at least some, if not all the parts, are produced by OEMs and third-party suppliers outside of the U.S., China, India, Hungary, Czech Republic, Mexico, Canada and others. When a consumer or company has a product liability case against a manufacturer, it becomes even more complex than when everyone is in the United States, especially when an OEM or third-party component manufacturer has no assets in the U.S. or is legally impenetrable, meaning the courts and government typically do not cooperate with or recognize verdicts in U.S courts. Both India and China do not have legal reciprocity with the U.S. courts, and it can be tough for consumers and VARs to file suit against a company based in either country or pursue an insurance claim with their non-U.S. insurance company. Furthermore, when a consumer purchases a product from a smaller foreign company that has zero U.S. presence outside of an eCommerce listing on Amazon or a similar site, there’s not much they can do to recoup damages if they or a family member is injured or worse due to a defective product that was 100% made overseas.
For U.S manufacturers – VARs and OEMs – the best protection against liability risk from foreign suppliers is to stop purchasing products via purchase orders if doing so, and to create very clear contracts between each entity in the supply chain from start to finish. U.S. VARs and OEMs need to secure agreements from all suppliers and component part manufacturers, including those based outside the U.S., to follow U.S. laws and jurisdiction, including arbitration clauses in all product liability disputes. Furthermore, U.S. manufactures must always hold liability insurance and include contract clauses that stipulate all suppliers and manufactures hold insurance policies with U.S. insurance companies for business with U.S. companies and consumers. If the foreign OEM has zero U.S. assets, U.S.-based companies should also secure security from that foreign manufacturer or supplier, e.g., letters of credit from a U.S. bank, contractual holdbacks and/or U.S. guarantors.
Consumers and businesses can be proactive about protecting themselves against potential lack of recourse from potential product harm by becoming better educated about the companies they purchase from. With the inherent complexities in the modern supply chain, due diligence on the reputation of the manufacturers and OEMs and third-party component suppliers they purchase from and/or collaborate with is essential. All parties should ensure the manufacturers they purchase from are reputable and insured. It’s impossible to anticipate all risks that might exist when purchasing from any manufacturer, regardless of the country of origin. However, becoming better educated about the supply chain involved in the goods that the consumer or company uses can help ensure that, should harm caused by a product defect occur, liability can be determined, and any resulting damages can be collected.
In these types of product liability cases where there are complicated supply chain issues, including where a VAR blames the OEMs and/or aftermarket third-party manufacturers, accessories and suppliers, mediation can be extremely useful, even before the main mediation begins between those parties, who can and often are all co-defendants in a product liability dispute.  In these situations, the mediator can sit down with all co-defendants, and help all parties agree on how to apportion any potential liability between them. This mini mediation might involve getting all parties to consider the current state of their business relationship and if they would like to continue doing business together. It is important to begin by getting agreement with all the defendants, and depending on the product that could be 1, 2, 3 or more companies. During the actual mediation, the mediator can help the defendants make a reasonable offer to the plaintiff. Furthermore, because with product liability, there’s usually more than just one lawsuit or dispute, once the initial pre-mediation between all the defendants is settled and the first case gets mediated, those same agreements on percentage of liability and reasonable settlement amounts can be applied to and proposed to other plaintiffs in the rest of the mediations and/or court cases.
On the consumer side, especially if they do not have insurance, or insurance wouldn’t typically cover the type of product or injury that occurred, mediation can help ease the burden of a long, drawn-out lawsuit. Especially when a product defect led to a severe injury or loss of life. Nothing and no amount of money can alleviate the grief over the loss of a family member, or the loss of livelihood due to severe injuries, however, mediation can help plaintiffs put the loss behind them and move on. Mediation provides a safe, private space where all parties can come together, and with the help of a neutral agree to a resolution, even in the complex product liability disputes that can arise due to a manufacturing defect.
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