Wholesale Liability

Distributors are increasingly prominent targets in product liability lawsuits. Knowing what to expect and being prepared for it can make a huge difference in the outcome if your company is named in a suit.

How much confidence do you have in the products you sell?

You carry top-quality products that are developed, tested, certified and built by the best electrical manufacturers in the world. Your core customers are experienced, well-trained and concientious professional electricians. They know the products and know how to install them to ensure decades of safe and reliable service.

But what if something goes wrong and a product fails? What if there's a fire or an electrocution as a result? The threat to the people using the equipment is usually obvious and immediate. The threat to the distributor comes later, in court.

And what if the product doesn't fail? What if it works exactly as designed, but people discover some years down the road that the normal use of the product creates a health hazard? The threat to users may be neither obvious nor immediate. But again, the distributor is increasingly likely to find himself in a courtroom, defending his company's conduct and, perhaps, his livelihood and the livelihoods of all the people who work for him.

Product liability litigation is a real threat to electrical distributors today in ways it wasn't for earlier generations. Knowing where the threats are coming from and taking a fresh look now at policies and practices that could expose your company to an adverse judgment can make a huge difference once you get your day in court.

Back in the day, liability for a product failure rested squarely on the shoulders of the manufacturer unless there was proof of negligence or other contributing factors on the part of the seller. Sellers in the chain of distribution between manufacturer and point of use were indemnified — given legal protection — by the manufacturers. Today, things are not so cut and dried.

Under principles of joint-and-several liability, any defendant found to have any share of liability is potentially liable for the entire sum of a judgment in the plaintiff's favor. So if you're judged to be 10 percent to blame in a $10 million judgment, you're potentially on the hook for $10 million, not $1 million.

The reasoning behind joint-and-several liability is that people who've been harmed by a product should have every possible recourse for compensation for the damages they've suffered. It also allows plaintiffs to file suit in lower courts rather than having it removed to federal court just because a manufacturer is in a different jurisdiction. In practice, however, this has led to what one observer described as a “sue the phonebook” mentality among plaintiffs and their attorneys.

For more than two decades, efforts at tort reform through legislation have focused on limiting joint-and-several liability exposure for resellers of a product, but these efforts have fallen short at the federal level and found only sporadic success at the state level and below. (For more on this, see “Take It to the Hill” at www.ewweb.com.)

Two areas exist where distributors' exposure to product liability litigation appears to be growing, according to attorneys and expert witnesses with experience defending distributors in product liability suits: mass tort litigation and specific product-based litigation regarding the failure of a product made by a manufacturer that's beyond the reach of U.S. courts.

Mass Torts and Imports

Mass tort litigation brings lawsuits in clusters, aimed at a group of similar companies and based on a range of similar complaints. For attorneys interested in pursuing mass-tort claims, the costs of upfront medical and legal research and lining up expert witnesses can be spread across many suits and adapted to fit the factual details of each particular case, leading to economy-of-scale efficiencies for both the plaintiffs and the attorneys who are paid on each case. As a result, the practice has become a legal industry unto itself.

The highest-profile example is the asbestos lawsuits of the past couple of decades. There are many defendents, including asbestos manufacturers, OEMs whose products used asbestos, installers, and the whole supply chain that carried their products to market. Presumably, all of them thought they were selling a good, safe product to meet an important need. Once the studies linking the breathing of asbestos fibers to cancer came out, there were suddenly thousands of plaintiffs, all with specific but similar health-related complaints, coming after them.

Any newly discovered and widespread product- or process-related health hazard raises the possibility of mass tort action. “The legal community is always looking for a tool or process with many potential plaintiffs and many potential defendants,” says Mike Workman, a distribution consultant and principal of Workman and Associates, College Station, Texas, who has been called as an expert witness for distributors in more than a dozen product liability cases. “When they've tapped the manufacturers for all they can, the next target is distribution.”

Workman keeps an eye out for emerging mass-tort issues, and said he expects to see mass-tort activity around any workplace process involving environmental health hazards from dust or fumes, such as from soldering or welding, as well as insulation, both heat and electrical.

Although it's difficult to anticipate where exposure to a health-related mass-tort action will arise in the future, other trends could put distributors at even greater risk. The move by many distributors to sell goods manufactured overseas by companies that may have no U.S. presence and no clear legal standing in U.S. courts could become distributors' greatest liability concern.

If a product imported from one of these manufacturers fails, the distributor may well have the deepest domestic pocket available, making him a prime target for the lawsuit. The distributor in turn may find it difficult and costly to obtain indemnity from the manufacturer in the courts of the country of origin.

Distributors considering private labeling are a special case of this phenomenon. Having your name on a product raises your profile as a target of litigation, and you can expect your product liability insurance premiums to rise commensurately. (See “The 5-Ton Elephant,” page 28.)

Risk is Everywhere

Even if you strictly buy from domestic manufacturers with strong and supportive indemnification agreements, many other factors can increase the risk of being held liable for damages in a product liability suit. Many of them are standard operating procedures for distributors and some are critical differentiators applauded in the business press and trade association conferences. You can't get away from them entirely and hope to run a viable distribution business.

Repackaging and assembly. Anything you do that modifies a product or its packaging opens the door to increased liability. Distributors often put groups of products together and sell them as kits to make their customers' lives easier — so an electrician wiring a hotel has all the parts he needs at his fingertips as he moves from receptacle to receptacle. Some distributors do custom assembly of panel boards for industrial customers. Product labeling and packaging — especially those carrying safety warnings, MSDS sheets and the like — can be a factor in product liability suits, so taking care to preserve the original manufacturer's labeling is critically important.

Technical application support. Telling customers how a product can be used in their businesses is a huge part of the value many distributors add for their customers. Customers depend on it and will choose a distributor over a competitor for that reason alone. The most important consideration here is that the information your salespeople give your customers is safety-oriented and technically accurate. Statements such as, “No, it's not specified for indoor use by the manufacturer, but everybody uses it that way” should raise red flags.

Product recommendations. Simply advising customers that they should use one product instead of a similar alternative can form a basis for liability. Of course, as a distributor you can't do your job for your manufacturers without recommending a product, unless your business model is based solely on pull-through, warehousing and fulfillment and all product selection is done by the customer. For most distributors, promoting their manufacturers' products is their reason for being.

Installer training. A distributor that holds training sessions to teach customers the most efficient and effective way to use a product can expose himself to liability, especially if some of the information and training provided is inaccurate. In this, most distributors are on more solid ground because such classes are typically taught with technical support from manufacturers and reps.

Prepare Now

There are things you can do to prepare for your day in court.

Schedule time with your attorney. It's far less expensive to ask her for advice when there's not a case pending against you. You need counsel that is well versed in product liability law in every jurisdiction in which you do business, and it's even better if she is already familiar with the role of distribution in the supply chain.

Review manufacturer indemnification agreements. Indemnification agreements with manufacturers go some distance to protect you as a distributor in a mass-tort suit. According to Clem Carter, a partner in Williams Mullen, Richmond, Va., who has defended many distributors in product liability litigation, most manufacturers' indemnification agreements provide pretty good protection for the distributor, but they're not without limitations.

Over the past couple of years, many manufacturers have changed details of their distributor contracts, including the indemnification agreements, Workman says. In most jurisdictions they are required to notify you of the changes, but it's easy to put off digging into them if the notice arrives when there are irate customers and rogue salespeople cutting your margins. Read through them now and have your attorney review them.

Request certification of product liability insurance from your vendors, and make sure your company's name is on the policy. For starters, take a look at whether they cover you only in case of a court judgment or also cover legal expenses incurred in an out-of-court settlement.

Review your processes. As mentioned above, many standard distribution procedures carry some risk of product liability. You can't eliminate it all, but you need to understand where your exposure lies and do what you can to eliminate needless risk.

Review your product liability insurance coverage. If you don't already have product liability insurance for your business, seriously consider it. If you do have coverage, review it with your attorney and make sure you're covered for the risk factors identified in your process evaluation.

Review your record-keeping processes. Good record-keeping is often a key to putting together a strong defense, says Carter. A distributor who has records of where the products came from, how they were handled, who they were sold to and for what purpose have a much stronger position.

Come up with a plan. Make sure you have a checklist for the day when you are served, so you and your staff don't have to figure out who to call and what to do when the pressure is on.

Battle Plan

When you are faced with a product liability suit, there are a number of things you need to be aware of.

Get your own attorney and prepare a stand-alone defense. Don't expect your manufacturers and insurance companies to provide your defense for you. In an excellent article for the Defense Research Institute titled “Defending the Distributor in Mass Tort Litigation,” Robert Redmond, also a partner in Williams Mullen, illustrates many situations in which manufacturers and distributors named as co-defendents in a lawsuit find their interests at odds.

“The distributor must be prepared for unexpected rough treatment from the manufacturer co-defendents,” Redmond writes. “Manufacturers have every reason to reduce their liability by suggesting fault on the part of the distributors.”

For instance, it's not uncommon for a manufacturer to make a settlement with the plaintiff that includes withdrawing the expert witnesses retained for the manufacturer's defense and barring them from testifying. When this happens, the distributor can be left without expert testimony if he hasn't prepared a separate, stand-alone defense, Redmond writes.

It's also not uncommon for a distributor to have to file cross-claims against manufacturers and insurance companies to secure indemnification and coverage.

In the case of a property damage claim such as a fire that starts in an equipment closet, it may be difficult to determine exactly which piece of equipment caused the fire, but clear that your company sold the plaintiff most of the products involved. In this case, Carter says, you may have the manufacturers all asserting that it wasn't their product, and you become the focus of the litigation.

Make sure your attorney is involved in all proceedings from the beginning of the case. “A lawyer representing the distributor who has not participated in the litigation cannot ‘play catch up’ after the experts have been identified, the fact witnesses deposed and the exhibits exchanged,” Redmond writes.

Cooperate with plaintiffs in disclosure. It's tempting to put up all kinds of obstacles to keep the plaintiffs from collecting your records in the course of discovery, but this is the wrong time to be difficult. According to Redmond, plaintiffs in mass-tort litigation will frequently “serve voluminous discovery targeted at priviledged and confidential information” in an effort to drive up discovery costs to the point that the defendant will settle rather than go to court. A defendant who makes problems for the plaintiff in basic discovery is a likely target for such treatment.

Avoid needlessly aggravating the plaintiffs by resisting discovery of records such as sales and distribution reports. “Because the records do not generally harm the distributor (and in fact, identify manufacturers that should be protecting the distributor), it makes sense for the distributor to assist the plaintiff's counsel in interpreting the records when necessary,” writes Redmond.

Be ready to explain your role as a distributor. It's common for plaintiffs (and everybody else in the world) to misunderstand the distributor's role in bringing products to market. Workman observes that most plaintiffs and their counsel and most juries assume more of a retail model and overestimate the role the distributor has in product selection and other factors that could influence the course of litigation. Be prepared to explain yourself at length.

Don't expect it to get to court. Most product liability suits never get in front of a judge, much less a jury. Most are settled out of court to avoid the cost of litigation. In fact, this is the focus for much litigation, especially in mass torts — what one observer described as the “pay me not to sue you” model. Many product liability suits are settled through independent mediation.

In the end the goal is the same: resolve the dispute with your livelihood intact and get back to doing business.

Disclaimer: The author of this article is a journalist, not an attorney. Nothing in this article should be taken as legal advice; its intent is to make you aware of the situation and give you a starting point for discussions with your own counsel.

SEE ALSO: "Take It to the Hill"--The prospects for tort reform at the federal level may be more remote with the Democratic Party in control of Congress, but it’s too early to know for sure.

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