The Changing Face of Product Liability
With private label and an influx of counterfeits, risk spreads
By Lindsay Young
More distributors have been hit with product liability lawsuits.
If pursuing a private label, distributors must educate themselves on all
possible risks associated with taking on a manufacturing role.
Distributors and their customers must also be aware of the risk of
counterfeits in the supply chain, another potential source of liability
claims.
Nearly 250,000 circuit breakers can fit into one shipping container.
“Look at how many possible homes these circuit breakers infiltrate
and how many lives and properties can be damaged if the circuit breakers
are defective or not installed properly,” says Bernie Heinze,
attorney and president/CEO of Sequent Insurance Group, Philadelphia,
PA.
“And that is just one container. The amount of product that is
coming into the U.S. from offshore is increasing as distributors and
retailers look for ways to gain market share and increase profit
margin.”
The question, however, is: “To what end and at what cost?”
If something does go wrong with a product or a counterfeit makes its way
into an end-user’s hands, it’s impossible to avoid being
sued. “Anytime someone gets injured, they have the right to go to
a state or federal court and file a lawsuit so they can be compensated
for their losses,” Heinze says.
The face of product liability is changing as the market evolves, and
traditional sources of supply are challenged. Counterfeits have entered
the supply chain, and more resellers are getting involved with private
label products through their own operations overseas or even
domestically. In addition, many distributors have taken on
responsibility for installations, another area where something could go
wrong.
In recent years, the industry has seen a general increase in product
liability cases, though there is no sure way to tie that directly to the
reported increase in private-label production or the growing problem of
counterfeits, Heinze says. Still, the fact remains that anyone in the
supply chain, and not just the original manufacturer, can be held liable
for injuries or damage resulting from defective product.
If end-users, such as contractors, buy counterfeits even unknowingly
from a “cheaper” source, they may be held liable if that
product does not perform or causes injury or death. If a distributor
unknowingly sold that product to them, they can also be held liable.
On the private-label side, distributors must be educated on all possible
risks associated with taking on a manufacturing role, and they should
take a proactive stance to mitigate those risks.
“If the court that is involved with a case cannot get a hold of
the manufacturer, the distributor stands in the manufacturer’s
shoes,” explains John Selldorff, CEO of electrical manufacturer
Legrand/North America. “If you can’t get that manufacturer
to back you up, then you’re on the hook.”
Growing Trend
Counterfeit product, of course, is not the same as private label. But in
both cases, the product, legit or otherwise, is increasingly being
produced overseas in China and other lower-cost countries.
With private label, which includes products manufactured for a
distributor under contract or more traditional branded products acquired
by a distribution company, a distributor is taking on liability that
before was in the hands of the manufacturer. If an off-shore
manufacturer or broker cannot be reached by a court’s
jurisdiction, or no longer holds insurance to cover a reseller’s
liability, the reseller in court takes full responsibility, Heinze says.
Private-label sellers also face a higher risk infringing upon patents,
trademark or other intellectual property protections.
More than half of wholesalers with private label currently source
product from an overseas plant, according to Pembroke Consulting’s
Adam Fein, author of “Facing the Forces of Change: Lead the Way in
the Supply Chain,” available through the National Association of
Wholesaler-Distributors. More and more, distributors are opening offices
in Asia or other low-cost regions. By 2012, Fein says, more than 80
percent of distributors currently with private labels plan to source
overseas.
“This is not a pick-on-China or another country issue,”
Selldorff says. “A lot of manufacturers, including ourselves, make
product in China. It’s a question of whether you follow the
correct level of quality control in the manufacturing. Can you really
stand behind the product and how do you continue to properly invest in
the product?”
As Fein asks in “Facing the Forces,” do the supply chain
expenses and risks associated with private label reduce or eliminate
potential savings distributors may gain from global sourcing?
Selldorff says distributors and others who source overseas must
understand these risks. “The distributor takes for granted that if
the product doesn’t do what the manufacturer says it will do, the
manufacturer will stand behind them with insurance or replacement or
coverage of damages,” he says. “What they need to understand
is when they are dealing with some of these companies, there’s
nothing to back them up. Then they are left backing up the product
liability.”
Finding your way can be tricky, and requires extra care, he says. For
example, a manufacturer may show that it has insurance coverage in the
case of a liability claim. “But you have no proof that insurance
is in force the day after you see that certificate,” Selldorff
says. “A lot of companies will put insurance in place to secure
the business and then cancel it the next day.”
Legal Consequences
Joint and Several Liability is a doctrine, which most of the U.S. states
have adopted, which puts more than the manufacturer of a product at risk
to be sued.
“The law does not require you to sue the manufacturer of a product
defect. You can sue anyone in the chain of commerce,” Heinze says.
A law adopted in 1965 says that if you are involved in the chain of
commerce of a product deemed to be “ultra-hazardous,”
unreasonably dangerous or defectively manufactured, you can be held not
negligent but strictly liable. Strict liability eliminates any defense
people may have had under a negligence concept.
Heinze offered this as an example of the doctrine:
“Let’s say you’re at a stoplight and I pull up behind
you. The light turns green and I am hit from behind by a truck. I crash
into you. So, you can sue me for your injuries, you can sue the truck,
or you can sue all of us. Whether there is one person or 800 people, you
can sue them all or you can pick your choice. The law does not require
you to sue the manufacturer of a product defect. You can sue anyone in
the chain of commerce.”
The only thing that must be proven in strict liability is that the
product caused the injuries or damages sustained.
“Let’s say we have an off-shore manufacturer in China and we
have private-sourced a product from them. Our label is on it,”
Heinze offers as an example. “It comes to the U.S. and it is not
made according to UL specifications or there is a defect in it and it
causes an injury or a death.” The estate of the person who was
injured files a lawsuit.
“We say, ‘We have this contract with the manufacturer that
requires them to name us as an additional insured on their
policy.’ … So you now have a lawsuit and you send off your
insured endorsement and certificate of insurance to the broker and say,
‘Put them on notice. We just got sued.’ They come back to
you in 24 hours and tell you the policy was canceled. Then you are on
your own. Now it becomes your insurance policy and your bottom line is
at risk.
“In the event a manufacturer is not subject to the jurisdiction of
the U.S. – when they don’t have an office here or do not
have adequate insurance limits of liability to protect the distributor
– it is a fact of life in today’s channel that a distributor
may well have to stand in the shoes of a manufacturer, whether
it’s a consumer product, electrical or otherwise.”
Mitigating Risk
The risk of a product liability action goes beyond electrical goods to
drugs, toys and other products. Medical devices, including shunts and
stints, fail. Surprisingly, even liquor has been the target of lawsuits.
(“Oftentimes people sue because they believe that the liquor has
gotten them inebriated to such a point that they did bad things, so they
want to sue the maker of that liquor,” Heinze explains.)
Industrial machinery is another area of concern, for example sharp edges
or improper installations. Close to 60 percent of product litigation
cases Heinze sees are in the industrial arena. Construction defects are
also a growing target in the courts.
“When building materials started coming down in price, a lot of
manufacturers and builders who weren’t necessarily the best
started offering their wares and services to people all around the
country, and with the lack of skilled labor, it was not necessarily
built the way it should have been,” he says. “That resulted
in a lot of claims and lawsuits.”
Fein says in “Facing the Forces” that product liability may
limit distributors’ willingness to enter certain product areas in
private label – for example less likely to do power tools, but
more likely to go into areas such as plumbing fixtures and fittings.
Instead of focusing on how to avoid legal battles, distributors should
focus on implementing due diligence to lighten the impact of any legal
problem or to reduce the likelihood problems appear in the first
place.
United Stationers CEO Dick Gochnauer told MDM recently that distributors
should not go down the road of private label “lightly” and
when they do, to take steps to protect themselves. He said that at
United Stationers’ office in Asia, a large percentage of the staff
is in quality assurance: “In manufacturing plants, you have to
monitor very closely because you’re putting your name on the
product.”
Andrew Berlin, president of Berlin Packaging, says that even with the
advent of the Internet, “nothing beats walking the factory floors
and doing the audits and meeting the principals of these organizations
(overseas). There’s no shortcut for the hard work that goes into
finding these factories.”
Taking this extra time to find reliable factories mitigates some of your
risk.
Be Proactive
Here are a few items to mitigate risk, according to Heinze, though this
is just a drop in the bucket. Consult with your attorney before making a
move on private label or if you want to analyze your current sourcing
practices:
Do business only with an established and reputable
manufacturer or intermediary.
Evaluate potential exposure from products sold and
services provided in the regions and states in which you do
business.
Examine contracts and strength of agreements and
vendor/insured endorsements with manufacturers, distributors and others
in the supply chain.
Find out how able and responsive the manufacturer will
be in providing defense and indemnification for the sale of
their products.
Ensure the manufacturer’s insurance company is
financially secure. Obtain stronger insurance and umbrella
insurance protections if dealing with unknown manufacturers. Some
insurers won’t provide coverage if a distributor is dealing with
unauthorized entities.
Establish a business continuity plan in the case of
an investigation, lawsuit or claim.
Retain samples to compare against product delivered.
Look at country of origin for manufacturer and shipment. Look for
markings, misspelled words and logos on product. It could indicate a
counterfeit.
Recall Responsibility
In addition to risks associated with liability claims, distributors in
private label or who knowingly or unknowingly sell counterfeits may have
to take responsibility for product recalls, an expensive
consequence.
According to a recent National Association of Wholesaler-Distributors
legal brief (www.naw.org), when a
manufacturer is in a foreign country, is in bankruptcy, out of business
or “thinly capitalized,” distributors may hold the burden of
the recall. Products intended for use in commercial or industrial
settings may be considered consumer products and could fall under
Consumer Products Safety Commission jurisdiction.
The law authorizes the commission to order a seller of a product to
notify the buyers of the defect. It also requires sellers to repair the
defect, replace it with a defect-free product or refund the price of
that product.
Importers of motor vehicle parts and equipment face similar
rules.
This article was originally featured in Modern Distribution Management (MDM).
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