Minimizing a company’s legal exposure
When entering the U.S. market, foreign companies should be familiar with the U.S. legal system and more importantly, strategies to prevent unnecessary litigation.
Well…not so fast!
Be familiar with the U.S legal system
In litigation loving America, economic globalization has naturally led to increased legal disputes against foreign companies doing business in the United States. When entering the U.S. market, foreign companies should be familiar with the U.S. legal system and more importantly, strategies to prevent unnecessary litigation.
Clients doing business in the U.S. should be advised that the most effective way to resolve disputes is to avoid them in the first place. This article will discuss potential causes of action and serve as a guide on how to minimize legal exposure and risk for product manufacturers and distributors doing business in the U.S. through quality control, meticulous drafting of warranties, contractual agreements, product manuals, warnings and insurance coverage.
The U.S. Legal System
The types of lawsuits that may be filed in a U.S. court are far reaching in both subject matter and dollar amount. Foreign companies doing business in the U.S. should be mindful that seemingly frivolous claims that challenge the most basic principles of common sense may withstand initial judicial scrutiny and immediate dismissal. As both winning and losing parties are usually responsible for their own legal fees and costs, all claims, regardless of legal merit, can become costly.
Going further, the far-reaching scope of discovery allows for virtually unfettered discretion to seek documents, identification of witnesses and other information from parties to a lawsuit. The obligation to comply with broad discovery requests is often costly, time-consuming and may require disclosure of documentation within the company’s “possession custody and control.”
This legal requirement may directly conflict with the European Union’s General Data Protection Regulation (GDPR), a data privacy regulation which went into effect in May 2018 and limits the transfer of personal data to countries outside the E.U. A foreign based company may face conflicting legal obligations if a subpoena for documents served in a U.S. lawsuit requires the company to produce documents that may constitute protected personal data under GDPR.
Product Liability Claims
Product liability claims may be made against the designer and manufacturer in addition to any distributor, importer or seller in the chain of distribution who may be liable for injuries resulting from a defective product. The three most common product liability claims involve defective design, manufacturing defects or failure to warn/improper labeling.
A defective design claim focuses on the danger of a product based on the design as opposed to the manufacturing process whereas a claim alleging a manufacturing defect asserts the product was unsafe because it did not conform to its intended design. Failure to warn claims allege that a manufacturer failed to warn of an inherent danger in the product.
Before entering the U.S. market, a product manufacturer or distributor is advised to seek assistance to confirm compliance with federal regulations for certain products in addition to industry standards and the required product safety testing and certifications. In an effort to avoid legal action or provide a strong defense against claims or lawsuits, product manufacturers should ensure they have produced a safe product for which there is no safer alternative design.
Manufacturers should also perform regular, documented visits to the facilities where the products and/or all component parts are made and develop a protocol for the inspection of all components and finished products.
Warranties in the U.S. may be used as a shield against potential product liability claims. A carefully crafted express warranty is crucial for minimizing liability exposure for damages caused by an allegedly defective product. To be upheld in the U.S., warranty language must be clear and straightforward. Some warranty requirements regarding clarity and damage limitations vary by state.
An express warranty is a promise made about the quality and features of a product being sold (e.g. a watch is waterproof, or a washing machine will not fail during the first 3 years). An express warranty should clearly describe the manufacturer’s product and the specific length of time the company guarantees the product will be free from defects.
A manufacturer’s express warranty should only offer to repair or replace a product after the company is given ample time to provide an analysis to confirm the product is in fact defective.
A warranty should also purport to limit damages resulting from any defect to repair or replacement of the defective product and further disclaim recovery for consequential or indirect damages. Be advised that damage limitations must often be conspicuous and appear in capital letters or a specific font size. Further, a damage limitation for personal injuries arising from consumer goods is considered unacceptable.
Thus, foreign product manufacturers should consult with a U.S. attorney to ensure that warranty language associated with their products complies with federal and state law.
Careful drafting and review of contractual agreements can further assist in limiting exposure to damage claims. A well-written contract between a foreign manufacturer and a U.S. based distributor will include a limitation consistent with those in the governing manufacturer’s warranty.
Any contractual indemnity provisions will further attempt to exculpate a product manufacturer from defects arising from an installation error or another manufacturer’s product or component part. Alternatively, a foreign based distributor should insist on a contractual provision that indemnifies it from any damage claims arising from a defective product. Importantly, all insurance requirements set forth in a contract should be carefully reviewed by the company’s insurance carrier and attorney.
Product Manuals and Warnings
A manual for products sold in the U.S. should carefully set forth a description of the product and any installation instructions. As failure to warn and failure to instruct are common, but different, tort claims in the U.S., a manufacturer must provide adequate instructions about a product’s proper use and product warnings should detail risks that cannot be eliminated through reasonable design.
Even if adequate instructions are provided, a product manufacturer must provide warnings that inform users about potential dangers related to the nature and use of the product. Be mindful that even the most obvious dangers to a pragmatic individual may not be considered “obvious” to a litigious American end user! Foreign product manufacturers should also refer to U.S. standards setting forth requirements for the content, location and appearance (e.g. font size, symbols) for specific product warnings.
Importantly, foreign companies should also ensure that they have obtained adequate insurance to protect themselves in the event of a lawsuit in the U.S. As some European based policies exclude U.S. based claims and lawsuits, company representatives will want to evaluate their potential exposure and speak with their insurer or insurance broker to discuss adequate coverage.
In the US a commercial general liability policy will typically cover claims for negligence, personal injury, property damage, medical expenses, slander, libel and the cost to defend your company against these types of claims. Foreign manufacturers and distributors should be advised that a general liability policy may exclude claims involving the product itself.
Alternatively, product liability insurance protects against loss resulting from a defective product that causes injury or bodily harm, but not the product itself. A company should ensure it has both general liability and products liability insurance cover with sufficient limits to cover general and product liability claims. In the Nordic market these covers are often sold under one GLPL insurance policy.
Foreign manufacturers should also inquire about a vendor’s endorsement, product recall coverage and directors and officers (D&O) insurance. A vendor’s endorsement provides a manufacturer’s vendor with an “additional insured” status on the manufacturer’s policy and gives the vendor added confidence to sell and distribute a manufacturer’s product without fear of having a claim affect their general liability coverage or premiums.
It is further advisable for manufacturers to require that their distributors maintain a commercial general liability policy with adequate coverage to protect the manufacturer from the distributor’s negligence. Product recall insurance provides coverage benefits for a recall which go beyond the scope of the standard commercial general liability policy. Lastly, directors & officers insurance provides valuable defense coverage for claims which are asserted directly against the directors and officers of the defendant company.
Conducting business in the United States can be an exciting, yet sometimes daunting endeavor. However, taking in to consideration the points addressed in this article can facilitate success in the U.S. market. Fortunately, Shakespeare did not actually intend or desire to kill all the lawyers.
Keeping this in mind, foreign companies entering and operating in the U.S. market are advised to consult with their insurer, or insurance broker and attorney experienced in U.S. risk mitigation to assist in killing the danger of unnecessary and costly litigation brought by adversarial American consumers.
Lindsay E. Dansdill
Chicago, Illinois, USA