Latin American companies have had relatively open access to the market in the United State and sell billions of dollars of merchandise to U.S. consumers every year. While enjoying the fruits of this trade, Latin American companies should be aware of the potential pitfalls if the goods they sell to U.S. consumers are somehow defective or cause injury. The U.S. provides its consumers with specific legal protections against harmful products. Latin American companies need to know these laws if they want to protect themselves, while continuing their profitable relations with U.S. buyers.
U.S. consumers are generally protected in two ways: a person injured by a defective product has the right to file a lawsuit for damages in a United States court against any company that either manufactured, distributed or sold that product; and the United States government has the right to order a company to issue a recall of defective products that have the potential to cause injury. Knowing the laws providing for these two protections is the best defense to avoid a consumer or government action.
Products Liability Law
Each state in the U.S. has laws that allow consumers injured by products to bring a lawsuit and recover damages to compensate them for that injury, referred to as "products liability law." Products liability law in the United States is broad, and is intended to provide compensation for consumers of all types of products (toys, tools, chemicals, furniture, vehicles, etc.) if the consumer can demonstrate that he was injured by that product, whether because of a product’s faulty design, poor manufacture, or the company’s negligence or failure to warn about the dangers of the product. In general, the laws provide that a manufacturer, distributor or retailer is liable if a defect in the manufacture or design of its product causes injury while the product is being used in a reasonably foreseeable way. By example, if a man is on a ladder hanging lights and is injured after falling because a rung of the ladder was improperly attached and came loose, the man could sue claiming that the ladder was improperly manufactured. Alternatively, if the man slipped and fell because the ladder was designed with the rungs too far apart, the man could sue based on a design defect. There are common defenses that a company might assert in a products lawsuit. In this example, if the man used the ladder in a manner for which it was not intended, such as placing it on a chair, the company can assert the product was misused. Another defense is modification of the product, where the defendant will deny liability because the product was changed in the stream of commerce (for example, the man added three steps to the ladder). These cases are very fact specific and require someone familiar with the laws when gathering evidence.
A company may also be liable for failure to warn a consumer of the risks of using a product. A manufacturer or supplier of a product is required to give warnings of any dangerous propensities in the product, or in its use, of which he knows, or should know, and which the user of the product would not ordinarily discover. Whether a warning is sufficient depends on many factors including: the normal expectations of a consumer as to how a product will perform; the nature and magnitude of the danger; the likelihood of injury; and (4) the feasibility and beneficial effect of including a warning (for example, warnings on ladders typically warn not to step on the top rung because it is unstable).
Who can sue for products liability? The user of a product who is injured may sue, but so to can a bystander who is injured. Thus, in the ladder example, if a person standing nearby the is hit by the falling ladder when it breaks and suffers injury, the bystander can sue.
Who can be sued? Everyone in the chain of production and distribution may be sued for products liability, even retailers – liability is not just limited to manufacturers.
Subsidiaries of foreign corporations located in the United States expect to be sued for wrongs they allegedly commit. A common question for a company located outside the U.S. that manufactures or sells goods entering U.S. commerce is whether or not a United States court has jurisdiction to hear a claim against that foreign company. While Latin American companies sending products into the U.S. market must be prepared to be sued in the U.S., the United States Constitution offers some protection for foreign businesses under the "due process" clause. Under the U.S. Constitution, in order to assert jurisdiction over a foreign defendant, the defendant must have purposefully established sufficient "minimum contacts" with the forum so that the exercise of jurisdiction is reasonable. The factors for jurisdiction over a foreign company in the United States include the following, and again require a close look at the facts:
- The company must have sufficient “minimum contacts” with the forum state. Jurisdiction will exist if a corporation delivers its goods into the stream of commerce with the expectation that will be purchased by consumers in the state.
- The exercise of jurisdiction must not offend “traditional notions of fair play and substantial justice.” Several considerations may be assessed, including:
- Defendant’s burden of defending here;
- The forums’ interests; and
- Plaintiff’s interests in relief.
Latin American companies should be aware that injured plaintiffs may also try to sue the foreign parent company, along with any subsidiary, if the foreign parent company has the "deep pocket" who can pay more substantial claims. Plaintiffs will claim that the foreign parent company and the United States subsidiary are so interlocked that they are in effect the same company, and thus the parent should have to answer in the U.S. court. This is called the "alter ego" doctrine. Invocation of the alter ego doctrine to sue foreign parents is difficult, even if there is evidence of corporate unity. However, when doing business through U.S. subsidiaries, foreign corporations should be mindful to maintain at least some level of independence from the U.S. subsidiary.
If a consumer wins a lawsuit against a Latin American company, what type of damages can be awarded? The primary damages available to consumers are compensatory damages. The principal goal of compensatory damages is to place the injured person in the same position they were in before the injury or loss. The amount of damages will depend on the nature of the injury. Damages may include:
- Compensation for personal physical injury – medical costs, lost income, lost future earnings, pain & suffering;
- Emotional distress;
- Wrongful death; and
- Property damage.
In addition to compensatory damages, state laws allow for punitive damages. Punitive damages are intended to punish and deter intentional wrongful conduct. If a company takes actions which are either intentional or extremely reckless, punitive damages may be awarded.
Additionally, companies should be aware that consumers in the U.S. can bring what is known as a "class action." A class action is one that is prosecuted by one or more representatives on behalf of themselves and a group of persons similarly situated. This process allows people with small claims to bring a collective action on behalf of all people who were allegedly wronged (a class could include thousands of people). Damages can be extremely high, because of the number of plaintiffs, and there is a potential for treble damages and the payment of attorneys’ fees. Class actions can be avoided if the court does not find that substantial issues of law and fact are the same for all members of the class.
Recently, there have been many news reports about recalls of products in the U.S. from China, largely because children’s toys have been found containing lead. While Latin American companies have not yet faced similar mass product recalls, product recalls can affect companies from anywhere in the world. In the U.S., the Consumer Products Safety Commission is the federal agency that oversees most recalls of products which are defective. The Commission has jurisdiction over more than 15,000 kinds of consumer products used in and around the home, in sports, recreation and schools.
U.S. companies that sell or distribute products in the U.S. have a duty to report and recall potentially hazardous products. Because of jurisdictional issues, the primary burden in a recall is usually on the U.S. importer (or U.S. subsidiary of a foreign company). Failure to report dangerous products can mean massive fines and penalties.
The fact that the importer is primarily responsible does not mean that the foreign manufacturer is in the clear in the case of a recall. The manufacturer is obviously affected economically because its product can no longer be sold in the U.S. Moreover, importers will often turn to the foreign manufacturers who make the goods for indemnity and contractual assurances regarding the products that are imported.
The objectives of a recall are to: locate all noncompliant goods as quickly as possible, removed noncompliant products from consumer’s possession, and communicate accurately to the public about the product and the corrective action (this can involve press releases, web alerts, posters, a press conference, advertising or other methods of letting consumers know). Companies must contact stores and distributors to have products returned, and pay the retail price for the product that is returned. Recalls therefore can be expensive and need to be carefully managed.
While the Commission is the agency involved in most recalls of consumer goods, recalls of food, drugs (for humans and animals), vaccines, medical devices and cosmetics are handled by the Federal Food & Drug Administration (FDA). FDA recalls can be particularly onerous and stringent if food or drugs are involved.
Companies that face a recall may not only have to deal with one of these federal agencies, but may face a consumer lawsuit as well.
Awareness of products liability and product recall law in the United States is important when a company chooses to do business here. Ignorance of the law is no defense if an injured plaintiff sues or the government takes action. Though the law appears stringent, knowing the law allows a company to avoid damages lawsuits and allows a company to best defend itself in case a lawsuit is filed.
Polly Towill is a partner in the Business Trial Practice Group in the firm’s Los Angeles office. Ms. Towill has extensive experience in litigating complex business issues in state and federal courts and can be reached at firstname.lastname@example.org. Olivier Theard is an associate in the Business Trial Practice Group and Environmental Litigation Practice Group in the Los Angeles office of Sheppard, Mullin, Richter and Hampton LLP. He can be reached at email@example.com.