New York Court of Appeals Update (July 2019)

As the 2018/2019 Term approached the “homestretch”, the Court of Appeals published a “blockbuster” 4-to-3 decision holding that a commercial tenant-to-be, represented by counsel, could waive the right to prosecute a declaratory judgment action and seek Yellowstone relief; another 4-3 ruling with respect to personal jurisdiction over the Ohio firearms’ salesman of a gun used in a New York homicide; and a 6-1 opinion relating to strict liability for design defects. Consistent with a recent trend, all three cases featured unusually strident dissents.

159 MP Corp. v. Redbridge Bedford, LLC
2019 NY Slip Op 03526
Decided on May 7, 2019

In New York, agreements negotiated at arm’s length by sophisticated, counseled parties are generally enforced according to their plain language pursuant to the strong public policy favoring freedom of contract. May commercial tenants who unambiguously agreed to waive the right to commence a declaratory judgment action as to the terms of their leases ask the Court to invalidate that waiver on the rationale that the waiver is void as against public policy?

Answer: Under the circumstances of this case, the waiver clause was enforceable, requiring dismissal of the complaint.

159 MP Corp. and 240 Bedford Ave Realty Holding Corp. executed two commercial leases with the predecessor-in-interest of Redbridge Bedford LLC, the current owner of the building. Together, the twenty-year leases permitted occupation of 13,000 square feet of property in Brooklyn to operate a Foodtown supermarket. Rents started at $341,628 per year and were to increase over the lifetime of the leases to $564,659.02, which included a ten-year option at escalating rents. While the lengthy and detailed leases contained a standard form, its terms were not accepted as boilerplate but rather contained numerous handwritten additions and deletions, initialed by the parties. Of particular relevance, each lease also incorporated a 36-paragraph rider, which was also replete with handwritten additions and deletions. Paragraph 67(H) of the rider provides:

In March 2014, notices of various defaults were sent stating that tenants had fifteen days to cure the violations in order to avoid termination of the leases. Before the cure period expired, MP commenced this action by way of order to show cause in Supreme Court seeking a declaratory judgment that they were not in default. MP also sought a Yellowstone injunction in order to prevent the owner from terminating the leases or commencing summary proceedings during the pendency of the declaratory judgment action. Redbridge moved for summary judgment dismissing the complaint and argued that the action and, thus, the request for Yellowstone relief were barred by the waiver clause in the leases. In response, MP asserted that if interpreted in the manner urged by the owner, the waiver clause was unenforceable and that the waiver was premised on mutual mistake concerning the scope of summary proceedings.

Supreme Court denied MP’s motion for a Yellowstone injunction, granted Redbridge’s cross motion for summary judgment, and dismissed the action in its entirety. The Appellate Division, with one Justice dissenting, affirmed, determined that the declaratory judgment waiver was enforceable.

When parties set down their agreements in a clear, complete document, their writing should be enforced according to its terms. Applying well-settled contract interpretation principles, the unambiguous waiver clause reflected the parties’ intent that MP be precluded from commencing precisely the type of suit they initiated and, as such, a declaratory judgment action was foreclosed by the plain language of the leases. MP nonetheless asked the Court to relieve them of the consequences of their bargain, contending that the waiver clause violated a public policy strong enough to warrant a departure from the bedrock principle of freedom of contract. The Court of Appeals rejected that argument.

MP asserted that the declaratory judgment waiver was unenforceable because it was void as against public policy. Thus, MP’s challenge was not predicated on the circumstances surrounding the making of this particular agreement, such as allegations of unequal bargaining power, coercive tactics or lack of counsel — claims pertinent to other well-established contract defenses. Rather, MP’s contention was that the right to bring a declaratory judgment action was so central and critical to the public policy of this state that it could not be waived by even the most well-counseled, knowledgeable or sophisticated commercial tenant. The Court was unpersuaded.

A contractual provision is unenforceable where the public policy in favor of freedom of contract is overridden by another weighty and countervailing public policy. But, because freedom of contract is itself a strong public policy interest in New York, the Court may void an agreement only after “balancing” the public interests favoring invalidation of a term chosen by the parties against those served by enforcement of the clause and concluding that the interests favoring invalidation are stronger. Although the Court possessed the power to set aside agreements on this basis, the “usual and most important function” is to enforce contracts rather than invalidate them “on the pretext of public policy,” unless they “clearly . . . contravene public right or the public welfare.”

Here, the declaratory judgment waiver was clear and unambiguous, was adopted by sophisticated parties negotiating at arm’s length, and does not violate the type of public policy interest that would outweigh the strong public policy in favor of freedom of contract. Although MP argued otherwise, there was simply nothing in contemporary statutory, constitutional, or decisional law indicating that the interest in access to declaratory judgment actions or, more generally, to a full suite of litigation options without limitation, was so weighty and fundamental that it could not be waived by sophisticated, counseled parties in a commercial lease.

CPLR 3001 enables Supreme Court to grant declaratory judgments in the context of justiciable controversies but in no way indicates that sophisticated parties may not voluntarily waive the right to seek such relief. A declaratory judgment is a useful tool for providing clarity as to parties’ obligations and may, in some circumstances, enable parties to perform under a contract they might otherwise have breached. Access to declaratory relief benefits the parties as well as society in quieting disputes. However, a declaratory judgment is merely one form of relief available to litigants in enforcing a contract. In codifying the right to seek declaratory relief, the Legislature neither expressly nor impliedly made access to such a claim nonwaivable with respect to any party, much less sophisticated commercial tenants.

The availability of declaratory relief may indirectly encourage parties to freely contract at the outset, knowing that they can later obtain judicial clarification of their obligations at the moment a justiciable controversy arises. However, a party who has chosen freely to waive the right to seek such relief could not have relied on any such expectation; that party may compensate for the waiver by demanding greater clarity in the construction of other contract terms so that the parties’ respective rights and obligations are fully understood before they sign the agreement. Regardless, a party may agree to such a waiver during contract negotiations to obtain a valuable benefit, such as a rent concession or the inclusion of a cure period following a notice of default. Such considerations are for the parties to weigh in crafting a commercial agreement that meets their unique needs.

The waiver clause did not preclude access to the courts but left available other judicial avenues through which plaintiffs might adjudicate their rights under the leases. The waiver permitted MP to raise defenses to allegations of default in summary proceedings in Civil Court, under Real Property Actions and Proceedings Law article 7, and specifically stated that “it is the intention of the parties that their disputes be adjudicated via summary proceedings.”

RPAPL article 7 “represents the Legislature’s attempt to balance the rights of landlords and tenants to provide for expeditious and fair procedures for the determination of disputes involving the possession of real property.” Thus, the leases reflected the parties’ general intent to resolve their disputes in proceedings carefully designed for that purpose. Moreover, the waiver did not impair MP’s ability to seek damages on breach of contract or tort theories.

Nor was this declaratory judgment waiver rendered unenforceable because, under the circumstances presented here, it resulted in an inability to obtain Yellowstone relief. The Yellowstone injunction was a “creative remedy” crafted by the lower courts to extend the notice and cure period for commercial tenants faced with lease termination. In the wake of Yellowstone, tenants challenging notices of default in declaratory judgment actions “developed the practice of obtaining a stay of the cure period before it expired to preserve the lease until the merits of the dispute could be settled in court,” and courts have “accepted far less than the normal showing required” for injunctive relief under CPLR article 63. Requests for a Yellowstone injunction are necessarily made in Supreme Court rather than Civil Court, which lacks authority to issue injunctive relief and, as such, may not be obtained in a summary proceeding under RPAPL article 7. Yellowstone relief is merely a means of maintaining the status quo by tolling a contractual cure period during a pending action, permitting a tenant who loses on the merits of the lease dispute to cure the defect and retain the tenancy. Here, because MP’s declaratory judgment action was barred by the lease waiver, there was no pending action in which to adjudicate the parties’ rights and to support interim relief in the form of a Yellowstone injunction.

MP’s’ inability to obtain Yellowstone relief did not prevent them from raising defenses in summary proceedings if commenced and thus vindicating their rights under the leases if the owners’ allegations of default were baseless. The owner cannot evict MP without commencing a summary proceeding and establishing material breaches of the leases. Absent such a proceeding, MP remained in possession of the premises and their rights under the leases were undisturbed. If MP’s defenses failed on the merits — if MP in fact breached the leases — then their interest in the tenancy would properly be extinguished under the plain language of the leases. Furthermore, if MP believed that the owner was not performing its respective obligations under the leases, MP could bring an action in Supreme Court for breach of contract and request specific performance. Thus, a Yellowstone injunction was not essential to protect property rights in a commercial tenancy which are governed by the terms of the lease negotiated by the parties. Yellowstone injunctions are useful procedural tools for tenants seeking to litigate notices of default. But there is no strong societal interest in the ability of commercial entities to seek such a remedy that would justify voiding an unambiguous declaratory judgment waiver negotiated at arm’s length, merely because this incidentally precluded access to Yellowstone relief.

Wilson, J. (dissenting):

“Agreements at arm’s length by sophisticated, counseled parties are generally enforced according to their plain language pursuant to our strong public policy favoring freedom of contract.”. The majority’s thesis is our State’s commitment to freedom of contract is so powerful that it cannot be overcome by competing public policies unless, for example, the legislature has criminalized the object of the contract or has expressly stated a prohibition on waiver by statute. That thesis had little to do with this case. The public policy at play here, which required the Court to disallow contractual provisions depriving a party of the ability to seek a declaratory judgment, is the freedom of contract itself. A contractual provision that forecloses a party from timely knowing its contractual obligations — instead forcing parties to gamble on the contract’s meaning — undermined the contract and with it, society’s benefit from the freedom of contract.

Freedom of contract is not a limitless right. It should not be elevated above every other protection the law affords to litigants. The majority’s decision will result in the elimination of the “Yellowstone injunction”, a common-law precedent that has existed in New York for more than half a century. That injunction allows commercial tenants to determine their responsibilities under the terms of their lease agreements without risking eviction. The Yellowstone injunction expressed a public policy of this state and is grounded in the legislature’s century-old determination that New York’s public policy broadly favors the availability of declaratory relief in preference to more protracted, costly and antagonistic litigation.

After this decision, commercial building owners and landlords will undoubtedly include a waiver of declaratory and Yellowstone relief in their leases as a matter of course. Those clauses will enable them to terminate the leases based on a tenant’s technical or dubious violation whenever rent values in the neighborhood have increased sufficiently to entice landlords to shirk their contractual obligations. The majority’s decision will alter the landscape of landlord-tenant law, and of neighborhoods, throughout the state for decades to come, absent legislative action.

A waiver of the right to declaratory judgment creates instability by undermining the purposes and benefits of the freedom of contract, and the enforcement of such a waiver violates that very public policy. The ability to obtain declaratory relief is a part of our state’s public policy because it is an essential part of the policy of freedom of contract. The Court should no more allow contracting parties — however sophisticated — to strike declaratory judgments than the Court should allow them to strike the parol evidence rule or the statute of limitations. The majority’s fundamental mistake came from treating “freedom of contract” as if it were an individual right, when its raison d’etre is the economic advancement of society.

The waiver provision prevented MP from obtaining a Yellowstone injunction, even though it did not mention Yellowstone itself, because the tenants were limited to defending themselves in summary eviction proceedings commenced by Redbridge Bedford in Civil Court, and Civil Court lacks plenary authority to grant injunctive relief. If Civil Court determined during the summary eviction proceeding that MP was responsible for some or all of the alleged defaults, even if MP has all along been willing and able to cure those defaults, it would be too late: the leases would have been terminated.

That “all or nothing result” destabilizes contract relationships and neighborhoods, and effectively allows landlords who own buildings in gentrifying areas to terminate commercial leases at any time based on technical or minor violations. In other words, if a waiver of declaratory and Yellowstone relief is enforceable, it will be used by landlords as a mechanism to vitiate a lawful contract. That does not preserve the parties’ benefit of their bargain, it destroys it.

The public policy behind Yellowstone relief is not difficult to envision: commercial enterprises leasing business locations have a vested interest in remaining at the locations known to their customers, their premises are often fitted with industry-specific fixtures, and commercial evictions disrupt employments and potential business profitability.” The majority’s elimination of the clearly best option — knowing one’s rights before determining whether and what action to take — striked at the very core of declaratory judgments.

William v Beemiller, Inc.
2019 NY Slip Op 03656
Decided on May 9, 2019

May New York’s exercise of long-arm jurisdiction over an Ohio firearm merchant who sold a gun to an Ohio resident in Ohio who subsequently resold it on the black market in New York and was used in a shooting in New York?

Answer: In a 4-3 ruling the Court held that under the circumstances presented in this case, jurisdiction could not be exercised over Defendant Charles Brown under well-established due process precedent because he lacked minimum contacts with this state.

Brown, a federal firearm licensee, was authorized to sell handguns only in Ohio and only to Ohio residents, which he primarily accomplished through retail sales at gun shows held in various locations in Ohio. Brown did not maintain a website, had no retail store or business telephone listing, and did no advertising of any kind, except by posting a sign at his booth when participating in a gun show.

In a series of transactions, Brown sold handguns to James Nigel Bostic and his associates. Prior to the transaction involving the gun at issue in this case, Brown consulted with the Bureau of Alcohol, Tobacco, Firearms and Explosives to ensure its legality. For each transaction, the necessary forms required by the ATF were properly completed and submitted, the purchaser passed the required Federal Bureau of Investigation background check before the firearms were transferred, Brown verified that the purchaser had government-issued identification demonstrating Ohio residency, and notification of the purchases was timely sent to local law enforcement and the ATF. During the transactions, James Bostic indicated he was in the process of becoming a federal firearms licensee and was acquiring inventory for the eventual opening of a gun shop. Instead of opening a shop, Bostic brought the firearms to New York, illegally reselling one of the handguns to a Buffalo gang member. That gang member then used the handgun in a shooting that caused devastating injury to Daniel Williams.

This personal injury action was filed against Beemiller, Inc., an Ohio corporation and federally licensed firearms manufacturer, MKS Supply, Inc., an Ohio corporation and a federally licensed wholesale distributor of firearms, and Brown. Only Brown contested personal jurisdiction.

Supreme Court granted Brown’s motion to dismiss the action. The Appellate Division reversed, holding that plaintiffs made a sufficient showing of personal jurisdiction to warrant further disclosure. After extensive discovery, Brown moved for summary judgment dismissing the complaint, again asserting a defense of lack of personal jurisdiction. Supreme Court denied the motion. The Appellate Division reversed, granted the motion for summary judgment, and dismissed the complaint as against Brown. The Appellate Division credited plaintiffs’ argument that jurisdiction could be exercised under CPLR 302, New York’s long-arm statute, but the Court nonetheless reversed based on its conclusion that plaintiffs failed to establish the requisite minimum contacts under the due process clause.

A New York court may not exercise personal jurisdiction over a non-domiciliary unless two requirements are satisfied: the action is permissible under the long-arm statute and the exercise of jurisdiction comports with due process. If either the statutory or constitutional prerequisite is lacking, the action may not proceed. Due process requires that a nondomiciliary have “certain minimum contacts” with the forum and “that the maintenance of the suit does not offend traditional notions of fair play and substantial justice.”

With respect to due process, “[a] non-domiciliary tortfeasor has minimum contacts with the forum State . . . if it purposefully avails itself of the privilege of conducting activities within the forum State,” “thus invoking the benefits and protections of [the forum state’s] laws.” This test envisions something more than the “fortuitous circumstance” that a product sold in another state later makes its way into the forum jurisdiction through no marketing or other effort of defendant. Put another way, “the mere likelihood that a product will find its way into the forum” cannot establish the requisite connection between defendant and the forum “such that [defendant] should reasonably anticipate being haled into court there.”

The constitutional inquiry “focuses on the relationship among the defendant, the forum, and the litigation.” Significantly, “it is the defendant’s conduct that must form the necessary connection with the forum State that is the basis for its jurisdiction.”

Here, viewing the facts in the light most favorable to plaintiffs, the Court of Appeals agreed with the Appellate Division that the requisite showing of minimum contacts with New York was lacking. In asserting jurisdiction, plaintiffs relied on the fact that firearms sold by Brown in Ohio eventually reached New York and claimed that Brown should have had a reasonable expectation that this would happen based on conversations in which Bostic said he planned to open a shop in Ohio and “wouldn’t mind having a shop in Buffalo.” This evidence fell short of demonstrating purposeful availment.

Brown was not a member of the criminal gun trafficking conspiracy and had no distribution agreement with Bostic and his associates, who purchased guns in separate transactions. Brown offered uncontradicted evidence that Bostic, who resided in a neighboring Ohio town, represented to Brown that he had applied for a license that would, once acquired, permit him (like Brown) to sell handguns only in Ohio to Ohio residents. Despite Bostic’s stated aspiration to open a gun shop in Buffalo, the record was devoid of evidence supporting plaintiffs’ theory that, merely by selling handguns to Bostic, Brown intended to serve the New York market. Even if Bostic indicated that there was a chance that he might — at some undefined point in the future — transport the firearms to New York, Brown cannot be said to have “forged [constitutionally sufficient] ties with New York”[.]

Two judges who voted with the majority also joined in a concurring opinion by Judge Feinman:

Neither party disputed that plaintiffs established certain conditions precedent to jurisdiction under CPLR 302 (a) (3) of New York’s long-arm statute—that plaintiffs’ underlying causes of action arose from Brown’s tortious acts without the State (Brown’s allegedly negligent sale to Bostic in Ohio), which eventually caused injury within the state (the shooting of plaintiff Daniel Williams in Buffalo, New York).

“CPLR 302 (a) (3) (i) necessitates some ongoing activity within New York State” (Ingraham, 90 NY2d at 597 [some emphasis supplied]). This approach is grounded in the plain text of the statute. The first three clauses in CPLR 302 (a) (3) (i) allow for jurisdiction when the defendant “regularly [1] does or [2] solicits business or [3] engages in any other persistent course of conduct” in the State. These clauses address whether defendants have, of their own volition, engaged in regular or persistent activity in New York such that they have established sufficient contacts with this State.

In short, text, precedent, and legislative intent all compel the conclusion that the substantial revenue clause of CPLR 302 (a) (3) (i) requires evidence that the non-domiciliary not just derive revenue from New York State, but intended to derive revenue from this State. There was no evidence that Brown intended to derive such revenue here. Brown never contracted to provide services within New York, nor advertised or solicited business in New York, nor sent representatives or agents into New York, nor enticed New York residents or firearm distributors to come to Ohio to purchase firearms from him. While Bostic’s illicit gun trafficking from Ohio and subsequent sales in New York constituted a regular course of conduct within New York, such that Bostic could be said to have derived substantial revenue from this State. However, that he was “planning on possibly opening” or “wouldn’t mind having” a store in New York at some unspecified point in the future, was not enough to attribute this regular course of conduct to Brown.

Jurisdiction was similarly lacking under CPLR 302 (a) (3) (ii). To find jurisdiction under this subparagraph, a plaintiff must demonstrate that the nondomiciliary “expects or should reasonably expect the act to have consequences in the state and derives substantial revenue from interstate or international commerce.”

Judge Fahey wrote the opinion for the three dissenting Judges:

Daniel Williams was shot in a case of mistaken identity while he played basketball in front of a neighbor’s house in Buffalo in August 2003. The bullet that struck plaintiff entered his stomach, and closing the wound required 22 stitches. A promising student, Williams could barely walk when he was released from the hospital, and those injuries sidelined a basketball career that included plaintiff’s consideration as an NCAA Division I prospect.

Brown sold that gun and other firearms at gun shows in Ohio. The gun was one of 182 such weapons Brown sold to Bostic and Kimberly Upshaw at such shows in 2000. All of those purchases were cash transactions, and all of the guns obtained from Brown in Ohio were transported to and sold illegally in Buffalo. One of those weapons—which was part of an 85-gun bulk sale—made its way to Cornell Caldwell, who used it to shoot plaintiff. Eventually, from those facts and allegations arose three sets of charges. Caldwell pleaded guilty to assault in the second degree — a class C violent felony — based on his participation in the incident.

Bostic pleaded guilty to federal trafficking crimes based on his participation in the scheme through which Caldwell obtained the gun that he used to shoot plaintiff.

There was no dispute of the requirement of CPLR 302 (a) (3) (i) that Brown knowingly derived substantial revenue from goods used or consumed in this state has been met. The analysis turned on the meaning of the word “substantial,” which was subject to both a “proportion” test and a “quantity.”

Irrespective of whether the “proportion” test or the “quantity” test was employed, the result was the same: Brown’s merchandising led to the conclusion that he knowingly “derive[d] substantial revenue from goods used or consumed in [this state],” thereby satisfying CPLR 302 (a) (3). The record reflected that Brown sold a significant number of guns to Bostic and Bostic’s associates in 2000, that those guns were used and consumed in New York State, and that those sales constituted approximately one-third of Brown’s total sales in that year.

In reaching a different result, the majority concluded that plaintiffs’ allegation that Brown derived “substantial revenue” from New York based on his Ohio sales to Bostic and Bostic’s associates did not permit the exercise of long-arm jurisdiction over Brown because Brown also did not engage in a regular course of conduct within New York State. That conclusion conflated what the legislature has said are to be separate analyses under romanette (i) of CPLR 302 (a) (3).

Specifically, the majority implied that a single business transaction that yields “substantial revenue from goods used or consumed . . . in this state” did not permit the exercise of personal jurisdiction if that substantial revenue was not also the product of a “regular course of conduct in this state.” In CPLR 302 (a) (3), the legislature separated degree of revenue from constancy of conduct when it provided that a court may exercise personal jurisdiction over any non-domiciliary who “engages in any . . . persistent course of conduct[] or derives substantial revenue from goods used . . . in th[is] state.”

The facts easily satisfied the “interstate or international commerce” prong. Personal jurisdiction may be exercised over a non-domiciliary when, among other things, such party (1) “expects or should reasonably expect the act to have consequences in the state”; and (2) “derives substantial revenue from interstate or international commerce.” Both prongs were satisfied based on Brown’s personal and active multiple sales of guns to Bostic intended for sale in New York.

Brown’s business could not “be characterized as local.” By its nature and intent, gun shows attract out-of-state buyers and Brown conducted business at shows held along Ohio’s “I-75” corridor, which provided easy highway access to buyers from neighboring states including Indiana and Kentucky. Approximately 10% of Brown’s sales for the period from 1996 to 2005 were of an interstate nature. Counting the guns sold to Bostic and his cohorts, then nearly 15% of Brown’s total sales during the subject period were to out-of-state buyers.

The “direct consequences” element “is intended to ensure some link between a defendant and New York State to make it reasonable to require a defendant to come to New York to answer for tortious conduct elsewhere.” That is, “[t]he nonresident tortfeasor must expect, or have reason to expect, that [its] tortious activity in another State will have direct consequences in New York.”

It was hard to imagine that Brown did not “expect or should [have] reasonably expect[ed]” his sales to Bostic “to have consequences in this state.” Brown’s commercial relationship with Bostic was not an isolated transaction. Over the course of six months, he sold a total of 182 handguns to Bostic and his associates on six different occasions.

The requisite “minimum contacts exist where a defendant purposefully avails itself of the privilege of conducting activities within the forum state.” That test has “has come to rest on whether a defendant’s conduct and connection with the forum State’ are such that it should reasonably anticipate being haled into court there.'” “A non-domiciliary tortfeasor has minimum contacts’ with the forum State—and may . . . reasonably foresee the prospect of defending a suit there—if it “purposefully avails itself of the privilege of conducting activities within the forum State.

Here, Bostic effectively acted as a distributor of Brown’s products in this state. The record reflected that Brown marketed to Bostic as a New York State businessperson in an effort to move Brown’s inventory. Brown acknowledged that Upshaw was with Bostic when Brown met with Bostic at a June 2000 gun show, that Upshaw knew about the stores that Bostic intended to open, and that Brown knew that Upshaw planned to open the stores with Bostic. At the same meeting, Bostic and Upshaw collectively purchased 13 guns from Brown; five were purchased by Bostic, and eight were bought by Upshaw. Brown “had some assumptions” that Bostic and Upshaw were partners at that time and, as of September 2000, he thought that Bostic and Upshaw might be “dealers.”

Brown also acknowledged that his interaction with Bostic included “a lot of talk regarding . . . a retail shop . . ., how many [of the subject devices Bostic] should . . . start with, [what] would be a good mix[, and] different items with regard to opening a retail store.” That conversation lasted “probably 45 minutes,” and the record reflected such dialogue occurred before the sale.

Brown’s sales to Bostic (in an enterprise that flirted with the bounds of legality, as evinced by Bostic’s plea of guilty to federal crimes arising from these transactions) undoubtedly benefitted Brown by expanding his market beyond local purchasers to New York distributors. Brown purposefully derived benefit from the re-sale of guns Brown sold to people whom he knew to be New York distributors. Thus, Brown’s conscious sale of weapons to be marketed and sold in New York satisfied the minimum contacts test.

Subjecting Brown to jurisdiction in New York would “further fundamental substantive social policies.” Principles of federalism and comity support exercising jurisdiction over dealers like Brown who supply the illegal interstate gun market.

All of the guns sold by Brown to Bostic and his associates were Hi Point 9mm semi-automatic pistols, characterized as a “Saturday Night Special”—that is, “cheap, low quality, easily concealable guns that are disproportionately used by criminals and widely recognized as having little or no legitimate value or utility.” They are “junk guns,” practically purposed only to cause harm to other human beings. The shows at which Brown sold those weapons were held in Ohio, where gun control laws are less strict than the laws of New York. In the 12 years leading up to the sale of the guns to Bostic, the ATF determined that over 10,000 guns sold by Beemiller had been used in crimes.

The gun that ended Daniel Williams college basketball prospects was one of many such devices sold by Brown to Bostic in conjunction with Bostic’s announced efforts to establish a foothold in the New York State marketplace, and it follows that due process is satisfied and that jurisdiction can be exercised over out-of-state firearms suppliers who sold guns that are trafficked over state lines.

Fasola v Bobcat of N.Y., Inc.
2019 NY Slip Op 03657
Decided on May 9, 2019

In Scarangella v Thomas Built Buses, the Court of Appeals recognized an exception to the general rule of strict products liability for design defects, where, under certain circumstances, the manufacturer offers a product with an optional safety device which the purchaser chooses not to obtain. Is this exception unavailable when the defective product came into the injured end user’s hands through the rental market, rather than by a purchase transaction?

Answer: No such “rental market” exclusion from Scarangella is appropriate.

Elias Fasolas was killed while operating a Bobcat S-175 “skid-steer” loader with a bucket attachment when a small tree entered the open operator cab, crushing him. Fasolas obtained the loader from Port Jefferson Rental Center, Inc., a retail rental center, pursuant to a two-day rental contract. Bobcat Company manufactured the loader and Bobcat of Long Island, Inc., a distributor, sold it to Taylor along with three others at a price of approximately $22,000 each. Taylor had similarly purchased twenty S-175 loaders with bucket attachments from Bobcat during the preceding decade, which were rented to a diverse clientele including schools, fire departments, churches, local businesses, contractors and homeowners. Fasolas’ estate brought strict products liability claims against Bobcat and Taylor on defective design and failure to warn theories.

The Bobcat S-175 loader is a ride-on machine that can be used for multiple light construction functions. It consists of a motorized base with wheels and hydraulic arms that can be raised and lowered. The loader can be used for different functions when connected to different attachments. It has an open front operator cab and includes rollover protection and fall protection systems as standard safety features. According to the manufacturer, the cab is open for easy use, convenient entry and exit and to promote operator visibility.

The loader can accommodate up to 150 different attachments, which are purchased separately. Each attachment performs a different function, enabling the machine to be customized for use for a variety of distinct tasks. The bucket attachment, which is available with or without teeth, is intended to be used to level soil and pick up or transport dirt, broken branches and other loose debris. A bucket with teeth, the attachment on the loader rented by Fasolas, was also able to dig up and loosen hard-packed earth. Some attachments — such as the “brush saw” and “jackhammer” — come with a “special applications kit” as a standard feature due to the potential for flying debris to enter the cab during the types of operation calling for those attachments. The special applications kit consists of a top, rear windows and front door made of a half-inch-thick plexiglass called “Lexan” and can be attached to the loader to enclose the cab and thus restrict airborne material from entering that area.

Although it was standard with some attachments, the door kit could also be purchased as an optional component at an approximate cost of $800 to $1000 and used when the loader was equipped with the bucket attachment. However, Bobcat did not recommend the door kit for use with a bucket attachment like the one rented to Fasolas, since debris was not expected to fly into the cab if the bucket was used as intended — to dig or move soil and other loose debris. According to Bobcat, the loader with bucket attachment was not intended to be used to knock down rooted trees, as other attachments were available for that function.

The precise circumstances surrounding Fasolas’ rental and use of the loader remained unclear. However, Taylor employees testified that it was standard practice to carefully question each prospective renter of a loader about the intended use of the product, explaining that they would refuse to rent the loader with bucket attachment for inappropriate tasks, such as removing tree stumps. The 9-foot-tall tree that killed Fasolas was still rooted in the ground and apparently slid past the loader’s bucket attachment, entering the open cab. The loader that Fasolas was operating was at rest in an area comprised of brush and small trees.

The estate alleged that the loader was defectively designed because it did not incorporate the optional door kit. Their expert testified that the failure to include the door kit as a standard feature for any S-175 loader with bucket attachment destined for the rental market was a “design defect” and that the Lexan door could have saved Fasolas’ life by deflecting the tree from entering the cab. He conceded that the loader as configured without the door kit was not defective for all uses. His theory was that the defect was present when the product was placed in the “rental market” because, in his view, this created the potential for an untrained end-user to use the product in a manner for which the optional door kit would be recommended. The expert further opined that every piece of equipment going to the “rental market” needed “all of the safety devices available.” The expert did not offer a basis for the implicit conclusion that a purchaser of the product would necessarily have more training or experience than a renter or would be better able to do without optional safety devices. The expert admitted that the loader and the cab’s opening complied with all industry standards for skid-steer loaders and represented industry “best practice”; he conceded that no industry writing, standard or expert supported his opinion that a loader sold to a rental company required a door kit as a standard feature.

Bobcat’s position was that the S-175 loader with bucket attachment was not defective without the door kit when used for its intended purpose — to move soil. Bobcat contended that Taylor had been made aware of the availability of the door kit through a variety of means, including handbooks and safety manuals accompanying the machines, and conversations between employees of Bobcat’s distributors and Taylor’s employees. Bobcat’s employees testified that, upon delivery of each loader to Taylor, each item on a general checklist was checked off, including the availability of the optional door kit. Bobcat’s theory was that Fasolas misused the product by attempting to plow over or dig up trees, which was not a proper use of the loader with bucket attachment. The manufacturer’s employees explained that different attachments for the loader were available for leveling trees and included the door kit as a standard feature to prevent airborne material from entering the cab.

At the close of plaintiff’s case, Bobcat moved for judgment as a matter of law dismissing the complaint against them, contending that they could not be liable for failing to make the door kit a standard feature and should be relieved from strict liability under Scarangella. Tracking the 3-pronged Scarangella test, Bobcat argued that (1) Taylor, the purchaser, was thoroughly knowledgeable about the loader with the bucket attachment and actually aware that the door kit was available; (2) under normal circumstances of use the loader with bucket attachment was not unreasonably dangerous without the optional door kit; and (3) Taylor was in a superior position than Bobcat to balance the benefits and risks of not purchasing the optional safety kit for the product’s contemplated use by its clientele, including Fasolas.

The trial court reserved decision on the motion and denied Bobcat’s request that the jury be instructed to consider whether Bobcat satisfied the Scarangella test. In its strict product liability charge, over Bobcat’s objection, the court departed from the pattern jury instructions, fashioning a new charge advising the jury that it could find that the loader was “defective if it’s not reasonably safe, and in this case we mean reasonably safe to be put in the rental market.” The jury was also instructed to consider whether the loader was defective because it did not “include a protective front door . . . for the purposes of being rented.”

The jury found that Fasolas was not at fault and rendered a verdict in favor of plaintiff, awarding $1 million in damages and finding Bobcat and Taylor liable on the defective design theory. It did not credit the failure to warn theory as against Bobcat but found that Taylor’s warnings were defective and was inadequate.

The court denied Bobcat’s motion to set aside the verdict, rejecting the argument that the court erred in modifying the product liability charge to reflect the “rental market” theory. The court reasoned there were “two streams of commerce into which the [loader] . . . was released and to which Bobcat owed a duty,” and it was the “home owner, non-professional occasional renter who deserved protection from such dangers.”

The Appellate Division affirmed, framing the question as “whether the manufacturer and seller of a product that is allegedly defective because of the absence of an optional safety device can invoke the Scarangella exception to liability where the product was sold to a buyer which rented the product to the ultimate consumer.” The court answered that question in the negative, holding “that the Scarangella exception is not applicable where, as here, the product is sold to a rental company.” The court reasoned that Bobcat knew “Taylor would be renting the loader to persons over whom Taylor had no control, and who might lack any experience operating heavy equipment.”

The Court’s recognition of the strict product liability cause of action rested on the principle that the manufacturer was in a superior position to know when its product was suitably designed and safely made for its intended purpose. Thus, imposing strict liability on the manufacturers for defects in the products they manufactured “should encourage safety in design and production, and the diffusion of this cost in the purchase price of individual units should be acceptable to the user if” it results in added assurance of protection. Although originally applied to cases involving manufacturing defects, the cause of action evolved to include claims based on defective design.

In Scarangella, the Court recognized an exception to the general rule of strict liability for design defects, where the manufacturer offers a product with an optional safety device that is not a required accessory, the purchaser chooses not to buy it and an injured party claims the product is defective due to the absence of the accessory. There, the plaintiff — a bus driver — was injured when struck by a bus that was being operated in reverse by a co-worker. She brought a defective design claim against the bus manufacturer, claiming the bus should have been equipped with an automatic back-up alarm because a driver always has a substantial blind spot when operating in reverse. The manufacturer offered an optional back-up alarm but plaintiff’s employer declined to purchase it because it was noisy and the employer was concerned about receiving complaints from the bus yard’s suburban neighbors, instead opting to instruct drivers to sound the horn when reversing.

In determining that the manufacturer should not be liable for the accident, the Court held that a product is not defective — and a manufacturer or seller is not strictly liable for a design defect based upon a claim that optional safety equipment should have been a standard feature — when the following three conditions were met: “(1) the buyer is thoroughly knowledgeable regarding the product and its use and is actually aware that the safety feature is available; (2) there exist normal circumstances of use in which the product is not unreasonably dangerous without the optional equipment; and (3) the buyer is in a position, given the range of uses of the product, to balance the benefits and the risks of not having the safety device in the specifically contemplated circumstances of the buyer’s use of the product.” When these elements are present, “the buyer, not the manufacturer, is in the superior position to make the risk-utility assessment, and a well-considered decision by the buyer to dispense with the optional safety equipment will excuse the manufacturer from liability.”

There was no claim that Scarangella was wrongly decided. Rather, the dispute was over whether the exception is categorically unavailable to a manufacturer that sells its product to purchasers known to rent the product to the public. Bobcat asked the Court to reject the holding below that Scarangella had no application where “the product is sold to a rental company” — a conclusion apparently reached by no other court.

Both courts below, according to the Court of Appeals, misinterpreted the third Scarangella factor which requires consideration of the purchaser’s ability, in light of the possible uses of the product, to assess the risks and benefits of purchasing the safety device given the circumstances and the contemplated uses of the product at the time of acquisition. For these purposes, the contemplated “use” of the product was not “rental” or “placement in the rental market” — that was merely the process by which the product came into the hands of the end user. The preoccupation with this process deviated from the analysis in Scarangella by shifting the focus away from the purchaser’s knowledge of the product and ability to make a reasoned judgment concerning the utility of the safety feature and toward the nature of the marketplace through which the product passed.

Bobcat’s theory was that the loader was not unreasonably dangerous without the optional door kit when used for its intended purpose of moving soil and that Taylor knew its own clientele and was in control of who would have access to the loader (i.e., its rental customers) and for what purpose. Thus, it argued that Taylor was in a superior position, given the wide range of uses of the product, to balance the benefits and risks of not purchasing the door kit in the specifically-contemplated circumstances of its clients’ intended uses. Taylor’s status as a retail rental company did not establish, as a matter of law, that it was not in a position to engage in the balancing analysis contemplated by the third prong of Scarangella. Whether the buyer exercised control over the product’s use in its capacity as an employer or otherwise was a consideration that was relevant to a determination of the buyer’s relative “position” to engage in the proper balancing inquiry — but it was not dispositive. A lessor may be able to appropriately mitigate risk by carefully controlling to whom it rents its products and for what use. In this case, testimony was presented that Taylor rented its products to businesses, contractors, schools and other community institutions, such as the fire department — entities that may have possessed training and expertise in the use of loaders and other construction equipment.

The Court was also unpersuaded that the Scarangella exception was categorically unavailable to Bobcat because “the person making the purchasing decision on Taylor’s behalf was not at risk of personal harm through use of the loader without the optional safety device.” There was no “risk of personal harm” requirement in Scarangella. It was not unusual for a purchaser to obtain a product contemplating its use by someone else — an employee, co-worker, partner, family member or, as in this case, customer. The fact that the end user may not be the purchaser is also not disqualifying under Scarangella. In fact, in that case the purchasing decision was made — not by an employee who worked in the bus yard — but by the president and chief operating officer of the bus company, which owned and operated 190 school buses and had 300 employees.

The Scarangella purchaser undoubtedly took the safety of his employees into account when he made the “considered decision” not to purchase the back-up alarm. The majority was unwilling to presume, as a matter of law, that a purchaser such as Taylor would not have a comparable interest in the well-being of its retail rental customers. Moreover, unlike the bus company, which was shielded from direct liability for employee injury by the Workers’ Compensation Law, Taylor could be — and in fact was — held liable for Fasolas’ injuries and, thus, had and retained a pecuniary interest in ensuring the safety of the products rented to its customers. Scarangella‘s 3-prong test — faithfully applied — already required assessment of the purchaser’s basis of knowledge concerning the scope of the intended uses of the product and its ability to weigh the risks and benefits of available optional safety devices. There was no need to engraft a “rental market” exemption.

Rivera, J. (dissenting):

The Court of Appeals previously identified seven nonexclusive factors to be considered in balancing the risks created by the product’s design against its utility and cost, including: “(1) the utility of the product to the public as a whole and to the individual user; (2) the nature of the product—that is, the likelihood that it will cause injury; (3) the availability of a safer design; (4) the potential for designing and manufacturing the product so that it is safer but remains functional and reasonably priced; (5) the ability of the plaintiff to have avoided injury by careful use of the product; (6) the degree of awareness of the potential danger of the product which reasonably can be attributed to the plaintiff; and (7) the manufacturer’s ability to spread any cost related to improving the safety of the design.”

In Scarangella, the Court recognized an exception to a manufacturer’s strict liability for a design defect and shifted the manufacturer’s responsibility for the risk-utility analysis to a buyer with superior knowledge about the risks and benefits of the buyer’s contemplated use without the optional safety device. “In an effort to lend predictability to litigation of this kind,” the Court identified “some governing principles for cases where a plaintiff claim[ed] that a product without an optional safety feature [was] defectively designed because the equipment was not standard.”

“A product is not defective where the evidence and reasonable inferences show that: (1) the buyer is thoroughly knowledgeable regarding the product and its use and is actually aware that the safety feature is available; (2) there exist normal circumstances of use in which the product is not unreasonably dangerous without the optional equipment; and (3) the buyer is in a position, given the range of uses of the product, to balance the benefits and the risks of not having the safety device in the specifically contemplated circumstances of the buyer‘s use of the product. In such a case, the buyer, not the manufacturer, is in the superior position to make the risk-utility assessment, and a well-considered decision by the buyer to dispense with the optional safety equipment will excuse the manufacturer from liability. When the factors are not present, there is no justification for departure from the accepted rationale imposing strict liability upon the manufacturer because it is in a superior position to discover any design defects.”

The majority adopted the view that the exception recognized in Scarangella applied to absolve the manufacturer of strict liability for a design defect when it sold its product to a rental company that had knowledge about the product and the manufacturer’s optional safety device. The majority’s analysis mischaracterized the relevant question as “whether the exception is categorically unavailable when the allegedly defective product came into the injured end user’s hands through the rental market, rather than by a purchase transaction.” The question was not whether the end user rented or purchased the product, but whether the end user had the type of knowledge necessary to make the risk-benefit analysis that traditionally falls to the manufacturer. The majority’s rejection of a `rental market’ exclusion from Scarangella was an answer in search of a problem. It was already the case that a rental company was subject to claims for liability for its role in the distribution chain of an allegedly defectively designed product. The real issue was whether the manufacturer could escape strict liability by choosing to distribute its product through a third-party rental company. Prior cases, including Scarangella, did not mandate absolution where the information available to the buyer failed to place the buyer in the position of “a highly knowledgeable consumer.”