Products Liability Litigation

Why the recent growth of “no-injury” or “economic loss” cases raises significant legal challenges for manufacturers.

The volume of products  liability lawsuits alleging no physical injury and seeking solely economic damages has grown significantly in recent years. Often brought as proposed class actions, these suits are also known as “no-injury” or “economic loss” cases. While extraordinary attention has been given to the recent General Motors (GM) ignition switch recall and litigation, the focus on such high-profile litigation makes it easy to forget that numerous other products liability lawsuits – usually involving smaller manufacturers and far less expensive consumer  goods – are filed each year. In 2012 and 2013,  94,960 products  liability cases were filed in U.S. federal courts1. This equates to approximately one out of every six cases filed, and these statistics do not reflect the numerous actions filed in state courts.

According to one insurance industry group,  the average jury award in products liability suits in 2012 was $3,439,035, and the median award was $1,503,339.2 With the exception of medical malpractice claims, these awards far surpassed  those granted in all other types of cases. What’s more, they do not include the costs necessary to defend  these cases and obtain a verdict.

A closer look at many high-profile product  defect cases reveals a fundamental shift in their focus. Unlike the claims found in traditional product  defect litigation, which focus on proof of a defect,  products liability cases increasingly focus on a company’s knowledge of, and response to, an alleged defect. For example, the recent amended complaint filed against the post-bankruptcy GM entity totaled nearly 700 pages and contained 150 separate counts. The majority of those counts alleged the company violated state consumer  protection laws or committed  consumer  fraud.

Consumer  protection cases can pose very different challenges compared to traditional products liability claims. For instance, a significant part of the GM case will undoubtedly concentrate on whether the ignition switches actually were “defective.” However, as a practical matter, the consumer protection claims will focus less on the switches and more on GM’s response to the alleged problem.  Moreover, these cases also allow plaintiffs to seek measures  of damages that are unavailable under traditional products  liability theories.

Products liability laws frequently present  legal hurdles for plaintiffs who have incurred no physical harm and little or no damages. Defect claims may require the plaintiff to prove a design or manufacturing flaw in the product, and he or she may be unable or unwilling to meet that burden.  And traditional tort-based products  liability theories frequently do not permit recovery without some physical injury to the consumer.  The historical remedy for a consumer with a defective product under those circumstances was to seek redress under a warranty, but many states now limit the ability of consumers  to bring warranty claims if they did not actually purchase  the offending  product.  Thus, consumer protection laws present a unique opportunity to bring claims arising from a product  that may not have ever manifested a defect or caused the consumer  physical harm.

Traditional products liability claims

Products liability laws govern when – and whether – a person allegedly harmed  by a defective product  can receive compensation for his or her physical injuries. Courts recognize claims arising out of three basic types of defects: manufacturing defects, design defects and warning defects. Traditional products  liability lawsuits can involve any combination of these defects, and the burdens of proof for each can vary according to the cause of action alleged by the plaintiff and the particular governing state law.

Tort-based claims – In most instances, the primary cause of action is a tort-based claim, the most common of which are strict liability and negligence. In general, strict liability focuses on proof of a defect in the product, while negligence focuses on the manufacturer’s conduct. Some plaintiffs also allege fraud, but these claims are less common and more difficult to prove.

Breach of warranty claims – In contrast, these claims are contractual in nature and focus on express or implied representations to the consumer about the quality or character of the goods. The ability to allege warranty claims is limited in some states by the nature of the relationship – or privity – between the consumer and the defendant. While the relationship that qualifies as the required amount of privity varies, in some states a lack of direct privity with the manufacturer can preclude breach of warranty claims.

Consumer protection claims

The 1970s saw a dramatic increase in the enactment of state and federal consumer  protection statutes. These statutes are often denominated as an unfair and deceptive trade practices act (UDTPA), and they exist in most states.  UDTPA statutes cover a wide range of business practices and govern almost every aspect of consumer commerce from basic consumer products, such as food and beverage, to banking services. The common state goal of these statutes is to protect consumers, and the statutes usually identify activities that qualify as unfair or deceptive acts or practices, including “[r]epresenting that goods or services are of a particular standard, quality, or grade or that goods are of a particular style or model, if they are of another3.”

There are a number of reasons why plaintiffs may seek to bring products  liability claims under UDTPA laws. In addition to permitting the recovery of punitive damages, many laws contain provisions that multiply the plaintiff’s damages and permit the recovery of attorney’s fees. Also, rather than focusing on an actual injury caused by an identifiable defect, alleged consumer protection violations may focus on abstract allegations about a company’s knowledge or marketing of a defective product. The standards of proof for these statutes vary, but many also limit the need to prove intent to deceive the consumer or actual reliance on a manufacturer’s representations. Finally, plaintiffs often argue that these consumer  protection statutes are appropriate for class action treatment seeking purely economic damages, which might not be available or practical under traditional product liability theories.

No-injury claims

Manufacturers of automobile components, food and beverages, pharmaceuticals, medical devices and durable consumer products, such as washing machines, have all been recent targets of plaintiffs seeking recovery of purely economic losses in no-injury suits. The classic no-injury product  defect case involves a consumer with no personal injury or property damage, who merely alleges the product  is worth less than the purchase price because of an alleged defect that was revealed after the purchase. Accordingly, the plaintiff often seeks to recover an alleged diminution in value – the difference in value between the defective product and the intended product.

A related measure of damages is advanced under a “price inflation” or “price premium” theory, and usually asserts that the consumer purchased a product based on representations of certain quality or characteristics, such as “all natural” or “made in the USA.” This type of damages claim is often associated with a claim of fraud on the market and can arise after a manufacturer sells a new or premium product based on improved characteristics, such as new features or health benefits.

Most of these claims are brought as class actions that attempt to aggregate the small economic losses into larger, cumulative nationwide or statewide claims. While there are additional legal hurdles posed by class actions, there is a strong incentive for plaintiffs’ counsel to seek class certification due to the possibility of combining numerous small injuries or recovering attorney’s fees. In a class action, a diminution of value may be sought on behalf of numerous purchasers of the product, so the cumulative damages sought by plaintiffs can be significant.

The speculative nature of these damages is often exacerbated by the fact that the plaintiff was never harmed because the product never malfunctioned. In fact, the only damage may be the alleged refusal of the company to recall a supposedly defective product. Moreover, manufacturers can find themselves in costly insurance disputes if carriers deny coverage based on policy exceptions addressing property damage and completed operations hazards.

Diminution of value is not a new concept, but this type of recovery remains very controversial in the product defect context, and diminution in value claims have been subjected to scrutiny by numerous state and federal appeals courts under a variety of legal rationales.

Many courts have upheld challenges to these no-injury suits, but the justifications for dismissing them vary. Some courts have ruled that these claims do not warrant class action treatment, which may remove the incentive for the plaintiff to pursue the case. Other courts have held that a plaintiff may not seek damages for alleged defects that have not manifested themselves.

Many courts have addressed the obvious lack of any physical injury because, in most states, the economic loss doctrine precludes tort claims in which the only thing injured is the product itself. Thus, while there are some exceptions to this rule, many states do not permit tort and certain warranty claims to proceed unless the plaintiff can demonstrate physical injury or damage to other property. Likewise, some courts have simply refused to permit recovery under a UDTPA theory where the only injury alleged is a diminution of value in the product.

Conclusions

In recent years, many manufacturers have faced product defect cases in which no physical harm to a person or property was alleged. The proliferation of these cases has paralleled an increase in the number of class actions filed in this country. However, even though these cases can present significant and costly legal challenges, some manufacturers have been successful in obtaining favorable resolutions of the litigation, including dismissals or judgments in their favor.