Globalization Ups Ante For Product Liability

Distributors must protect themselves from lawsuits involving overseas manufacturers.

By Brian N. Johnson, Esq.

Given the current competitive global business environment, many companies expect to do business with entities from overseas locations. In order to maintain the benefits of transacting business overseas, domestic companies—particularly distributors—must consider several issues when selling goods in the United States that are manufactured in other countries. Without taking precaution, a distributor can find itself as a target defendant in an expensive product liability lawsuit, and distributors can be sued for distributing overseas products in every state. Fortunately, there are steps that distributors can take to protect their legal position in American courts.

While many of these issues are the same as those a distributor would experience in a partnership with a domestic supplier, legal protections that are available when doing business domestically often cannot be invoked against a foreign manufacturer. When distributors go into business with offshore companies, they need to conduct the proper due diligence. For example, financial records and lawsuit history should be areas of interest. If at all possible, distributors should also meet with representatives from the company and ask them a series of questions about their business practices—especially regarding defense of product liability lawsuits. Some points to discuss include:

• What is your litigation history in the United States? This involves the number of cases, as well as the outcome of those cases. Have distributors been sued? If so, has the company defended the distributors? If not, what are the reasons?
• Do you have product liability insurance for products sold in the United States? If so, would the organization name the distributor as an additional insured in the insurance policy? What is the company's practice in terms of defending distributors that get sued for products it manufactures?

Middlemen Statutes
In the United States, distributors are often protected from product liability threats under what are sometimes referred to as middlemen statutes. These statutes, which exist in most states, essentially shield a company in the chain of distribution if it does not have any input in the design, manufacture or packaging of the product. However, there are exceptions that exist in many of these statutes that make it possible for the distributor to be sued.

The most common exceptions are:

• If the manufacturer does not have the financial means to pay a judgment;
• If the manufacturer is not subject to suit in the United States or in the particular state where the accident happened;
• If the manufacturer goes out of business or goes bankrupt;
• If the distributor has input in the design, manufacture, packaging, warnings, instructions, etc.

One important point to note regarding the second bullet above concerns The Hague Convention for Service Process. Under this treaty, foreign corporations can be sued in the United States if plaintiffs follow a series of specific steps. However, many countries do not belong to The Hague Convention, which means it is very difficult to sue foreign manufacturers in the United States. The plaintiff will instead go after the distributor. Therefore, it is important for the domestic distributor to research if the country with which it is doing business is a member of The Hague Convention. The bottom line is the protections offered by these middlemen statutes here in the United States are not necessarily a panacea. There are numerous exceptions and interpretations of various state laws that must be considered.

Other Steps for Protection
Contract Terms — Another consideration is the issue of contractual indemnity. The distribution agreement should include a clause setting forth that the manufacturer will defend and indemnify the distributor for any litigation brought against the distributor in connection with product liability cases brought by persons injured by the product. This may enable the distributor to enforce this clause against the foreign manufacturer in the event the distributor gets sued for injuries caused by products sold in the United States.

Insurance — As mentioned above, insurance is another protective step. Either the distributor can purchase its own product liability insurance or it can ask to be included on the policy of the manufacturer.

Fluency — In addition, product warnings should be reviewed by American experts, and bilingual experts should be made available as witnesses. Foreign manufacturers often create their own instruction manuals and product warnings. Therefore, conveying the necessary information for the instructions or warnings can be lost in the translation. It is difficult for an American jury to find for the company when safety information from a warning or manual is ambiguous. If possible, an English-speaking lawyer who specializes in product liability should review all manuals, instructions and warnings in case they ever reach a jury for a judgment on the reasonableness of the materials.

Foreign Corporations
Clearly, many of these same reputation and litigation concerns apply to American manufacturers, but the big difference lies in how American courts interact with foreign corporations. In the United States today, any manufacturer is, by and large, subject to a suit in any state where an accident occurs. That may not be the case when the suit involves a foreign manufacturer, however, as attorneys representing the injured party will then consider the chain of distribution and likely file suit against the American distributor. In those situations, the distributor may feel unequipped to defend the design of the product, the manufacturing process and the instruction manuals of a product for which they had no involvement other than the distribution.

Be sure to take these precautions and to hire experts where appropriate. Preventing a potential lawsuit can be less costly in the long run.