We’ve all heard about the woman who sued McDonald’s because her coffee was too hot, haven’t we. Many companies are afraid to even enter the US market, just because they’re scared they will get sued based on product liability. Well, guess what? As this blog post will explain, you can get sued even if you have no presence on the US market, if you could reasonably foresee that your products would make it to the US. The conclusion is: you’re better off if you take this matter seriously, and look into the options you have to protect yourself and your company, than if you stick your head in the sand and pretend you’re safe as long as you stay in the Nordics. Talk to your insurance broker and ask them to help you get a good insurance in place.
About Product Liability
A product liability claim can come about whenever someone is hurt (or killed) by a product. It doesn’t matter if the injured person was the actual purchaser of the product, or using a product supplied by an employer, lent the product by a neighbor or friend, or was not using the product at all. For example, if the blade on an electric saw shatters and fragments injure not only the user, but also injures three nearby workers, all four (user and three bystanders) can have a product liability claim.
I can’t be sued, I’m in the Nordics!
Is this really true? The short answer is, that the above statement is false. US courts will normally find that they have jurisdiction over foreign manufacturers on product liability claims if the manufacturers either (i) intended the products to be sold or resold into the US, or (ii) could reasonably foresee that their products would make it to US markets. While it may not be possible to sell products into the US without some risk for product liability claims, there are practical steps that can be taken to reduce that risk. This post examines some of the way non-US companies may currently engage with US buyers.
A tale in three scenarios
The made up company WidgetMaker AB is headquartered somewhere in the Nordics, let’s say Sweden, and it makes Widgets, which is a hardware product. Widgets are being sold in Europe, and now the CEO of WidgetMaker has decided to enter the US market. She has three choices; sell direct to US buyers, engage a US distributor, or create a US entity that will sell in the US. Her main concern in making a choice is concern over product liability litigation.
Engaging a US distributor
Engaging with a distributor sounds good because the distributor is in the US and will have to handle any headaches coming from anyone wanting to sue WidgetMaker. Unfortunately, distributors in the US are like distributors anywhere else in the world; they want to be paid and have no risks. It would be an extraordinary distribution agreement that didn’t have the manufacturer (WidgetMaker) indemnifying the distributor for any third-party claims, especially product liability claims. Usually, the language of the distribution contract states that the manufacturer not only indemnifies the distributor for any personal injury or death caused by the product, but such claims are typically an exception to any agreed limits on liability. This means there is no limit to the costs of indemnifying the distributor and paying any third parties who have been awarded damages by a court or through a negotiated settlement. There may be good business reasons for hiring a US distributor, but avoiding product liability claims is not one of them.
Selling directly from WidgetMaker to US buyers
What happens if WidgetMaker markets and sells directly to US buyers? US product liability law is based on a social policy of spreading the risk of harm for defective products to everyone in the chain of distribution, and making each strictly liable for any harm. Before modern product liability laws there were cases of persons harmed that had no remedy because they weren’t in direct contract with the responsible party, or the responsible party was no longer in business. The logic behind the modern law is that each “link” in the chain of distribution can add a small incremental cost to sales or services to cover the risk. The risk is shifted away from an individual, who otherwise may have to bear all the costs or harm alone, to entities that are better able to manage the risks.
Product liability law does not require negligence or “fault” by a party in order to have liability to the injured plaintiff. Everyone in the chain of distribution is “strictly liable” regardless of fault. That is why the US distributor is including indemnity provisions and exceptions to any limits of liability. It is also why the US plaintiff can go to court and name WidgetMaker as a defendant in a product liability suit because WidgetMaker is in the chain of distribution.
In another blog for legal geeks we can talk about how the US lawsuit is served on WidgetMaker in Sweden, and how any award by the US court can be taken to Europe to be certified and enforced on WidgetMaker, but for our purposes it’s only important to know it’s possible. It’s certainly more complicated and expensive than suits within the US, and the US’ treaties with other countries will matter. There are defenses to product liability claims, but selling direct to a US buyer from outside the country doesn’t create an impervious shield to product liability litigation.
A quick note on defenses. There are some, but again they are fact specific, and some may go towards avoiding liability and others towards reducing a damage claim. For example, when the injured person has removed or disabled all the safety features of a power hand saw and then injures himself using the saw in the unsafe condition and in an unsafe manner (e.g. a carpenter resting a piece of wood on his leg and then cutting both the wood and leg – unfortunately, a real case).
Creating a US entity
Will creating a US entity be an impenetrable shield against product liability claims against WidgetMaker? No, but it will reduce certain risks and raise certain barriers assuming all sales in the US are directly from WidgetMaker’s US entity (“WidgetMakerUS”) to the US buyer, and that WidgetMaker AB is not a party to the sales contract or active in the US. Again, without going into complicated and arcane legal processes, having a legal entity in the US makes it harder in some circumstances to name the foreign entity in the lawsuit, or makes it nearly impossible to obtain records from the foreign company. However, given the public policy behind product liability law, and the fact that WidgetMaker is probably the designer and/or manufacturer of the Widgets, the plaintiff that wants to name the foreign parent company won’t be barred just because WidgetMaker AB is not in the US.
That said, on the practical side, product liability claims are typically brought on a “contingent fee” basis. This means the attorney may advance the costs of the lawsuit and won’t be paid any fees unless there is a judgment or settlement. If there is a recovery, the attorney is paid a portion of the judgment or settlement after first recovering any monies advanced for the lawsuit. So why does it matter how the attorney is paid? The plaintiff and his attorney are seeking to recover a certain amount of money for the injury (e.g. medical expenses, lost wages, pain and suffering, etc.). Let’s say in the case where a Widget caused harm, the hoped for recovery is a million dollars. If WidgetMakerUS, and any other US defendant is likely to be able to pay that amount (directly or because of insurance), there is less reason to name WidgetMakerAB and bear the added costs and risks (e.g. treaty limitations) of cross-border litigation and prosecuting an enforcement action in the Swedish courts.
While a US legal entity does not guarantee liability protections for a foreign corporation, for many types of claims, liability does stop with the US entity. For example, a breach of contract claim would stop if the foreign corporation wasn’t a party to the contract. In addition to liability, there can be other benefits to the foreign company to having a legal entity in the US, and there are (or will be) other blog posts here talking about that.
Get an insurance!
So, what is my best protection when it comes to product liability? Using a good corporate structure with subsidiaries helps, but the best protection is to speak with a reputable insurance broker and obtain good coverage through a product liability policy and umbrella policies, not just for product liability claims, but for all your business operations in the US. Completed products and products coverage is standard and widely available. The insurance will not only protect your company against a valid claim, but given the costs of defense, the policy will also minimize the costs of defending claims your company may regard as weak or frivolous. This is the way nearly all US companies operate. As a practice note, if you have product liability insurance that is issued outside the US, check with your insurance company to make sure there is not a specific exclusion for US sales or product claims. Many non-US polices have such exclusions.
Or should I just stay home?
Whether or not to enter the US market is a business decision. However, it is a very large market and US companies are subject to the same product liability and other risks that your US entity will be subject to. You are competing on a level field, or if your overhead for engineering, design, G&A and other expenses is lower in your home country, perhaps the field is tilted in your favor. The risks of litigation can be managed through insurance, proper legal structures and good product design and manufacturing practices. It should also be noted that silly cases make better headlines. Later, when a court reduces an award, or the case is reversed on appeal, that isn’t exciting and doesn’t make it to the nightly news, or top of the website or front page of the paper [See Liebeck v. McDonald’s Restaurants (1994) https://en.wikipedia.org/wiki/Liebeck_v._McDonald%27s_Restaurants]. Lawsuits may be more common in the US than in Europe, but many suits are settled before going to trial and for amounts that make sense in the context of the claims.
To prove this is written by an attorney, I’ll add some disclaimers. Product liability is a complicated subject and this blog is just to illustrate some of the issues. The US legal system is very dependent on the facts of a case, and small facts matter. For example, there may be different outcomes if a product liability claim was based on a manufacturing defect rather than a design defect or a failure to warn. The laws of the fifty states and federal law are similar, but not identical and establishing a court’s jurisdiction (ability to hear the case) is also subject to complex rules. Product liability claims often involve multiple parties and claims and defenses will be different for each. Cross-border claims will be affected by treaties and the laws of each country. The safest course is to have your specific situation evaluated by an attorney.