As the 2015-2016 Term came to an end, the Court of Appeals issued two decisions arising from corporate mergers; two opinions involving product liability lawsuits against companies arising from the conduct of other companies; and a decision addressing the power of the Attorney General under New York’s Martin Act and Executive Law.
As to the appeals involving corporate mergers: one examined the terms of a proposed settlement of a class action seeking damages; and the other clarified the standards to apply when considering a shareholder’s challenge to a “going private” merger.
As to the decisions involving product liability lawsuits: one addressed when a US parent might be liable for the actions of a UK subsidiary; and the other addressed the duty to warn about a defect in another manufacturer’s product which is integral to the operation of the defendant’s product. In the final decision analyzed here, the Court decided the authority of the Attorney General to obtain permanent injunctive relief and disgorgement.
DID THE COURT PROPERLY REFUSE TO APPROVE A PROPOSED SETTLEMENT WHERE THE SETTLEMENT WOULD RELEASE AND EXTINGUISH DAMAGE CLAIMS RELATING TO A MERGER WITHOUT OFFERING OUT-OF-STATE CLASS MEMBERS AN OPPORTUNITY TO “OPT OUT”? ANSWER: YES.
Jiannaras v. Alfant, 2016 NY Slip Op 03548 (decided on May 5, 2016)
The Court of Appeals summarized the facts:
Google and On2 (a former publicly-held Delaware corporation domiciled in New York State) entered into a merger agreement on August 4, 2009. After announcement of the merger, plaintiff, the owner of common shares of On2 stock, brought a class action in Supreme Court on behalf of himself and other similarly situated On2 shareholders. He alleged that On2’s board of directors had, among other things, breached its fiduciary duty to its shareholders. He sought mostly equitable relief. Other On2 shareholders commenced similar actions in the Delaware Court of Chancery.
Thereafter, the plaintiffs in the New York and Delaware actions agreed with On2 and its directors to settle all claims with respect to the merger. The parties filed a stipulation of settlement with Supreme Court that provided for, among other things, dismissal of the New York and Delaware actions in their entirety, with prejudice, and a release of “any and all” merger-related claims. The settlement did not provide for opt-out rights. The court preliminarily certified the proposed settlement class pursuant to CPLR article 9, subject to final determination after a fairness hearing.
Over 200 shareholders filed objections alleging that “the omission of an ‘opt out’ right deprived out-of-state shareholders their ability to pursue claims arising from the merger.” Supreme Court “found the settlement to be fair, adequate, reasonable and in the best interest of the class members”; however, “the court refused to approve the settlement because it did not offer out-of-state class members the opportunity to opt out.” The Appellate Division affirmed.
The Court of Appeals also affirmed noting that “opt out rights ensure that class members will have the option of pursuing individual actions for redress”. And stating that “[i]n Phillips Petroleum Co. v. Shutts (472 US 797 ), the United States Supreme Court held that due process requires opt-out rights in actions ‘wholly or predominately’ for monetary damages”.
The Court of Appeals followed Shutts and its 1991 decision in Matter of Colt.
After Shutts, this Court in Matter of Colt considered whether a Missouri corporation with no ties to New York, had a due process constitutional right to opt out of a New York class action in which the relief sought in the complaint was largely equitable in nature. We held that “there is no due process right to opt out of a class that seeks predominantly equitable relief”. Nonetheless, we determined that the trial court erred as a matter of law by approving the settlement that purported to extinguish rights of non-resident class members to bring an action for damages in another jurisdiction…We noted that once “the parties presented the court with a settlement that . . . required the class members to give up all claims in damages, the nature of the adjudication changed dramatically”…In essence, while it was initially permissible to decline to afford class members the opportunity to opt out when the complaint demanded predominantly equitable relief, the trial court erred “by seeking to bind [class members] with no ties to New York State to a settlement that purported to extinguish [their] rights to bring an action in damages in another jurisdiction”.
While the complaint seeks predominately equitable relief, the settlement would also release any damage claims relating to the merger by out-of-state class members. The broad release encompassed in the agreement bars the right of those class members to pursue claims not equitable in nature, which under Shutts and Colt, are constitutionally protected property rights[.]
WHAT IS THE STANDARD OF REVIEW IN THE CASE OF A SHAREHOLDER ACTION CHALLENGING A GOING-PRIVATE MERGER? ANSWER: NEW YORK COURTS SHOULD APPLY THE “BUSINESS JUDGMENT RULE” PROVIDED THAT CERTAIN ENUMERATED SHAREHOLDER-PROTECTIVE CONDITIONS ARE PRESENT; AND, IF ANY OF THOSE MEASURES IS NOT PRESENT, THE “ENTIRE FAIRNESS” STANDARD APPLIES.
Matter of Kenneth Cole Prods., Inc, 2016 NY Slip Op 03545 (decided on May 5, 2016)
Kenneth Cole Productions, Inc. (KCP), the famous apparel and footwear designer, was organized with two classes of common stock. Class A stock, which were publicly traded, defendant Kenneth D. Cole (“Cole”) held approximately 46% of these shares. Cole owned all outstanding shares of Class B stock, which gave Cole approximately 89% of the voting power of the KCP shareholders. KCP’s board of directors consisted of Cole and the other individual defendants. Defendants Michael J. Blitzer and Philip R. Peller were elected by Class A shareholders. Defendants Denis F. Kelly and Robert C. Grayson held directorships voted on by both Class A and Class B shareholders, effectively giving Cole sole authority to fill these positions.
In 2012, Cole decided that he wanted to take KCP private so:
[C]ole proposed a going-private merger by informing KCP’s board of his intention to submit an offer to purchase the remainder of the outstanding Class A shares and, in effect, take the publicly-traded company private. After making this announcement, Cole left the meeting, and the board established a special committee to consider the proposal and negotiate any potential merger. The special committee consisted of directors Grayson, Kelly, Blitzer and Peller. On February 23, 2012, Cole made an initial offer of $15.00 per share. The offer was conditioned on approval by (1) the special committee, and, then, (2) a majority of the minority shareholders. At that time, Cole indicated that he had no desire to seek any other type of merger and, as a stockholder, would not approve of one. He also stated that, if the special committee did not recommend approval or the stockholders voted against the proposed transaction, his relationship with KCP would not be adversely affected.
Shortly after the announcement, several separate class actions were filed, including one by Erie County Employees Retirement System (the “System”), alleging breach of fiduciary duty by Cole and the directors. The special committee hired legal counsel and a financial advisor, and proceeded to negotiate terms with Cole to increase his offer several times to as high as $16.00. Cole later reduced his offer to $15.00, due to alleged problems in the company and the economy. Finally, the special committee convinced Cole to increase his offer to $15.25 for each outstanding share of Class A stock, which it recommended to the minority shareholders. In the shareholder vote, 99.8% of the minority shareholders voted for the merger.
The System sought (1) a declaration that Cole and the directors had breached fiduciary duties owed to the minority shareholders, (2) damages to the class, and (3) an injunction. Defendants moved to dismiss the complaint on the ground that it failed to state a cause of action. Supreme Court dismissed the complaint because “the complaint d[id] not contain adequate statements regarding a breach” of Cole’s fiduciary duty[.]”. The Appellate Division affirmed, holding that “the motion court was not required to apply the ‘entire fairness’ standard to the transaction”.
The Court of Appeals outlined the issues as follows:
The primary issue before us is what standard should be applied by courts reviewing a going-private merger that is subject from the outset to approval by both a special committee of independent directors and a majority of the minority shareholders. Plaintiff urges that we apply the entire fairness standard, which places the burden on the corporation’s directors to demonstrate that they engaged in a fair process and obtained a fair price. Defendants seek application of the business judgment rule, with or without certain conditions. We are persuaded to adopt a middle ground. Specifically, the business judgment rule should be applied as long as the corporation’s directors establish that certain shareholder-protective conditions are met; however, if those conditions are not met, the entire fairness standard should be applied.
Analyzed the contentions:
We begin with the general princip[le] that courts should strive to avoid interfering with the internal management of business corporations. To that end, we have long adhered to the business judgment rule, which provides that, where corporate officers or directors exercise unbiased judgment in determining that certain actions will promote the corporation’s interests, courts will defer to those determinations if they were made in good faith… The doctrine is based, at least in part, on a recognition that: courts are ill equipped to evaluate what are essentially business judgments; there is no objective standard by which to measure the correctness of many corporate decisions (which involve the weighing of various considerations); and corporate directors are charged with the authority to make those decisions…Hence, absent fraud or bad faith, courts should respect those business determinations and refrain from any further judicial inquiry…We have, therefore, held that the substantive determination of a committee of disinterested directors is beyond judicial inquiry under the business judgment rule, but that “the court may inquire as to the disinterested independence of the members of that committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee”[.]
Explained the “entire fairness” standard:
This Court’s seminal decision regarding freeze-out mergers is [the 1984 case of]Alpert v. 28 Williams St. Corp.[.] In that case, we recognized that, where there are common directors or majority ownership between the parties involved in a transaction, “the inherent conflict of interest and the potential for self-dealing requires careful scrutiny of the transaction”…In reviewing a two-step merger in Alpert, we held that while, “[g]enerally, the plaintiff has the burden of proving that the merger violated the duty of fairness…when there is an inherent conflict of interest, the burden shifts to the interested directors or shareholders to prove good faith and the entire fairness of the merger”…This “entire fairness” standard has two components: fair process and fair price…The fair process aspect concerns timing, structure, disclosure of information to independent directors and shareholders, how approvals were obtained, and similar matters…The fair price aspect can be measured by whether independent advisors rendered an opinion or other bids were considered, which may demonstrate the price that would have been established by arm’s length negotiations…Considering the two components, the transaction is viewed as a whole to determine if it is fair to the minority shareholders[.]
Adverted to a recent decision by the Delaware Supreme Court in which that Court addressed the very same issue:
The parties here debate whether we should apply the entire fairness standard, as in Alpert, or, alternatively, whether we should adopt the test recently established by the Delaware Supreme Court in Kahn v. M & F Worldwide Corp. (88 A3d 635, 648649 [Del 2014]) (MFW). In MFW, a controlling shareholder sought to purchase all of the shares of stock and take the corporation private, but made the proposal contingent from the outset upon two shareholder-protective measures — negotiation and approval by a special committee of independent directors, and approval by a majority of shareholders that were unaffiliated with the controlling shareholder…As in the case before us, the controlling shareholder also made it clear that it was not interested in selling any of its shares, would not vote in favor of any alternative sale or merger and, if the merger was not recommended, its future relationship with the company —including its desire to remain a shareholder — would not be adversely affected[.]
In MFW, the question before the Delaware Supreme Court was framed as “what standard of review should apply to a going private merger conditioned upfront by the controlling stockholder on approval by both a properly empowered, independent committee and an informed, uncoerced majority of the minority vote”…We are presented with the same question here. In prior cases, the Delaware Supreme Court had applied the entire fairness standard when reviewing mergers with interested directors, although the court had created a burden shift — placing the burden on the objecting minority shareholders — in situations in which the interested director required approval by an independent committee or a majority of the minority shareholders…Never before had that Court addressed a situation in which both of those protections were present[.]
Outlined the opinion of the Delaware Supreme Court:
The Delaware Supreme Court opined in MFW that the opportunity for review under the business judgment rule — as opposed to the entire fairness standard — created a strong incentive for controlling shareholders to provide a structure for freeze-out mergers that is most likely to protect the interests of minority shareholders, because when both protections are in place, the situation replicates an arm’s length transaction and supports the integrity of the process…That Court ultimately held that “business judgment is the standard of review that should govern mergers between a controlling stockholder and its corporate subsidiary, where the merger is conditioned ab initio upon both the approval of an independent, adequately empowered Special Committee that fulfills its duty of care; and the un-coerced, informed vote of a majority of the minority stockholders”…The Court articulated a number of reasons for the adoption of this new standard, including that: where the controlling shareholder clearly disabled itself from using its control to dictate the outcome, the merger acquired the characteristics of “third-party, arm’s length mergers” that are reviewed under the business judgment rule; “the dual procedural protection merger structure optimally protects the minority stockholders in controller buyouts”; it is consistent with the tradition of courts deferring to informed decisions by impartial directors, especially when approved of by disinterested and informed stockholders; and it will provide an incentive to create structures that best protect minority shareholders…The standard was summarized as follows:
“in controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority stockholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority”[.]
And adopted the MFW standard:
We now adopt that standard of review for courts reviewing challenges to going-private mergers. The standard set forth in MFW reinforces that the business judgment rule is our general standard of review of corporate management decisions, and is consistent with this Court’s statement in Auerbach that the substantive determination of a committee of disinterested directors is beyond judicial inquiry under the business judgment rule, but that courts “may inquire as to the disinterested independence of the members of [a special] committee and as to the appropriateness and sufficiency of the investigative procedures chosen and pursued by the committee”…While the business judgment rule is deferential to corporate boards, minority shareholders are sufficiently protected by MFW’s conditions precedent to the application of that standard in going-private mergers. Overall, the MFW standard properly considers the rights of minority shareholders — to obtain judicial review of transactions involving interested parties, and to proceed to trial where there is adequate proof that those interests may have affected the transaction — and balances them against the interests of directors and controlling shareholders in avoiding frivolous litigation and protecting independently-made business decisions from unwarranted judicial interference.
MAY THE UNITED STATES PARENT OF A UNITED KINGDOM SUBSIDIARY BE HELD DERIVATIVELY LIABLE TO A PRODUCTS LIABILITY PLAINTIFF UNDER A THEORY OF STRICT LIABILITY? ANSWER: NO, WHERE A PARENT WAS NOT A PARTY WITHIN THE DISTRIBUTION CHAIN AND DID NOT ACTUALLY PLACE THE PRODUCTS INTO THE STREAM OF COMMERCE.
Finerty v. Abex Corp., 2016 NY Slip Op 03411 (decided on May 3, 2016)
The Court of Appeals summarized the facts:
Plaintiff claims that he was exposed to asbestos during the 1970s and 1980s while replacing asbestos-containing brakes, clutches and engine parts on Ford tractors and passenger vehicles in Ireland. In 1985, plaintiff emigrated to Queens, New York, and, years later, was diagnosed with peritoneal mesothelioma.
The law suit:
In 2010, plaintiff and his wife commenced this action against, among others, Ford Motor Company (“Ford USA”), Ford Motor Company, Ltd. (“Ford UK”) and Henry Ford & Son, Ltd. (“Ford Ireland”) alleging strict products liability under the theories of defective design and failure to warn.
The prior proceedings:
After discovery, Ford USA moved for summary judgment seeking to dismiss the complaint on the ground that Ford USA did not manufacture, produce, distribute or sell the parts in question, pointing out that they were manufactured, produced, distributed and sold by its wholly-owned subsidiary, Ford UK. Ford USA further moved to dismiss the complaint pursuant to CPLR 3211 (a) (7) arguing that the complaint should be dismissed for failure to state a cause of action because it was devoid of any allegations supporting a claim that the court should “pierce the corporate veil” such that Ford USA could be held derivatively liable for the acts of Ford UK.
Plaintiff countered that Ford USA was “actively involved” in the design, specification, production and sale of Ford products throughout the world, including the United Kingdom, such that it could be held liable for the role it “independently played” in placing the products into the stream of commerce and in failing to warn plaintiff.
Supreme Court held that:
Supreme Court, while holding that there was no basis upon which to pierce the corporate veil, nonetheless determined that because plaintiff produced evidence showing that Ford USA “exercised significant control over Ford [UK] and Ford Ireland and had a direct role in placing the asbestos-containing products to which [plaintiff] was exposed into the stream of commerce,” there was a question of fact concerning Ford USA’s “direct responsibility for plaintiff’s injuries…”
The Appellate Division affirmed, concluding that:
[T]here was “no basis for piercing the corporate veil” but held that “the record demonstrate[d] that Ford USA acted as the global guardian of the Ford brand, having a substantial role in the design, development, and use of the auto parts distributed by Ford UK, with the apparent goal of the complete standardization of all products worldwide that carried the signature Ford logo”…As such, the Appellate Division held that there were factual issues concerning whether Ford USA could be found “directly liable as a result of its role in facilitating the distribution of the asbestos-containing auto parts on the ground that it was ‘in the best position to exert pressure for the improved safety of products’ or to warn end users of these auto parts of the hazards they presented”[.]
The Appellate Division granted Ford USA leave to appeal. By the time the case reached the Court of Appeals Ford UK and Ford Ireland were no longer parties due to lack of jurisdiction. The Court of Appeals summarized the applicable law:
It is well settled that a manufacturer of defective products who places them into the stream of commerce may be held strictly liable for injuries caused by their products, regardless of privity, foreseeability or due care…It is the manufacturer, and the manufacturer alone, “who can fairly be said to know and to understand when an article is suitably designed and safely made for its intended purpose” and who “has the practical opportunity, as well as a considerable incentive, to turn out useful, attractive, but safe products”[.]
Strict liability may also be imposed on retailers and distributors of allegedly defective products because such sellers, due to their continuing relationship with the manufacturers, are usually “in a position to exert pressure for the improved safety of products and can recover increased costs within their commercial dealings, or through contribution or indemnification in litigation . . .”Sellers who engage in product sales in the ordinary course of their business are subject to strict liability because they “may be said to have assumed a special responsibility to the public, which has come to expect them to stand behind their goods”[.]
And, after reviewing the facts, concluded that:
Ford USA, as the parent corporation of Ford UK, may not be held derivatively liable to plaintiff under a theory of strict products liability unless Ford USA disregarded the separate identity of Ford UK and involved itself directly in that entity’s affairs such that the corporate veil could be pierced…a conclusion that neither Supreme Court nor the Appellate Division reached in this instance.
It was also error for the Appellate Division to conclude that Ford USA could be subject to strict liability because it was in the “best position” to “exert pressure” on Ford UK for improved product safety. Of course, as Ford UK’s parent company, Ford USA could “exert pressure” on Ford UK, but we have never applied that concept to a parent company’s presumed authority over a wholly-owned subsidiary. We have, however, routinely applied that concept to sellers of a manufacturer’s products, because it is the sellers who, through their ongoing relationship with the manufacturers and through contribution and indemnification in litigation, combined with their role in placing the product in the consumer’s hands, are in the best position to pressure the manufacturers to create safer products[.]
DOES THE COMMON INTEREST PRIVILEGE EXTEND TO PROTECT ATTORNEY-CLIENT COMMUNICATIONS SHARED BETWEEN ENTITIES IN RELATION TO A MERGER RATHER THAN IN RELATION TO PENDING OR ANTICIPATED LITIGATION? ANSWER: NO, SUCH COMMUNICATIONS ARE PRIVILEGED ONLY WHERE THEY RELATE TO LITIGATION, EITHER PENDING OR ANTICIPATED.
Ambac Assur. Corp. v. Countrywide Home Loans, Inc., 2016 NY Slip Op 04439 (decided on June 9, 2016)
Plaintiff Ambac Assurance Corporation guaranteed payments on certain residential mortgage-backed securities issued by defendant Countrywide Home Loans, Inc., (“Countrywide”). When the mortgage-backed securities that Ambac insured failed Ambac sued in Supreme Court alleging that breach of contractual representations, fraudulent misrepresentation and fraudulently inducement. Ambac also named Bank of America as a defendant in the action, based on its merger with Countrywide. Ambac alleged that Bank of America was Countrywide’s successor-in-interest and alter ego and was responsible for Countrywide’s liabilities.
During discovery, a dispute about privilege arose:
[A]mbac challenged Bank of America’s withholding of approximately 400 communications that took place between Bank of America and Countrywide after the signing of the merger plan in January 2008 but before the merger closed in July. Bank of America had listed the communications on a privilege log and claimed they were protected from disclosure by the attorney-client privilege because they pertained to a number of legal issues the two companies needed to resolve jointly in anticipation of the merger closing, such as filing disclosures, securing regulatory approvals, reviewing contractual obligations to third parties, maintaining employee benefit plans and obtaining legal advice on state and federal tax consequences. Although the parties were represented by separate counsel, the merger agreement directed them to share privileged information related to these pre-closing legal issues and purported to protect the information from outside disclosure. Bank of America argued that the merger agreement evidenced the parties’ shared legal interest in the merger’s “successful completion” as well as their commitment to confidentiality, and therefore shielded the relevant communications from discovery.
Ambac moved to compel production on the ground that “Bank of America and Countrywide waived the privilege because they were not affiliated entities at the time of disclosure and did not share a common legal interest in litigation or anticipated litigation.” A Special Referee directed the parties to review the remaining undisclosed documents because “the exchange of privileged communications ordinarily constitutes a waiver of the attorney-client privilege and that the communications at issue would be entitled to protection only if Bank of America could establish an exception to waiver.” The Referee noted one exception, “the common interest doctrine, which permits a limited disclosure of confidential communications to parties who share a common legal (as opposed to business or commercial) interest in pending or reasonably anticipated litigation[.]”.
Bank of America moved to vacate the Referee’s decision “on the ground that its communications with Countrywide were protected by the attorney-client privilege even in the absence of pending or anticipated litigation.” Supreme Court denied the motion “holding that New York law ‘requires that there be a reasonable anticipation of litigation’ in order for the common interest doctrine to apply.’ The Appellate Division reversed, vacated the order and remanded for further proceeding holding that “pending or reasonably anticipated litigation was no longer a necessity of the exception[.]”. Subsequently, the Appellate Division granted Ambac leave to appeal.
The question considered by the Court of Appeals was “whether to modify the existing requirement that shared communications be in furtherance of a common legal interest in pending or reasonably anticipated litigation in order to remain privileged from disclosure, by expanding the common interest doctrine to protect shared communications in furtherance of any common legal interest.”
The Court of Appeals adhered to the litigation requirement because:
As an exception to the general rule that communications made in the presence of or to a third party are not protected by the attorney-client privilege, our current formulation of the common interest doctrine, is limited to situations where the benefit and the necessity of shared communications are at their highest, and the potential for misuse is minimal. Disclosure is privileged between codefendants, co-plaintiffs or persons who reasonably anticipate that they will become co-litigants, because such disclosures are deemed necessary to mount a common claim or defense, at a time when parties are most likely to expect discovery requests and their legal interests are sufficiently aligned that “the counsel of each [i]s in effect the counsel of all”…When two or more parties are engaged in or reasonably anticipate litigation in which they share a common legal interest, the threat of mandatory disclosure may chill the parties’ exchange of privileged information and therefore thwart any desire to coordinate legal strategy. In that situation, the common interest doctrine promotes candor that may otherwise have been inhibited.
In short, we do not perceive a need to extend the common interest doctrine to communications made in the absence of pending or anticipated litigation, and any benefits that may attend such an expansion of the doctrine are outweighed by the substantial loss of relevant evidence, as well as the potential for abuse. The difficulty of defining “common legal interests” outside the context of litigation could result in the loss of evidence of a wide range of communications between parties who assert common legal interests but who really have only nonlegal or exclusively business interests to protect[.]
And concluding that:
[T]he policy reasons for keeping a litigation limitation on the common interest doctrine outweigh any purported justification for doing away with it, and therefore maintain the narrow construction that New York courts have traditionally applied.”
DOES A MANUFACTURER HAVE A DUTY TO WARN AGAINST THE DANGER OF USING ITS PRODUCT WITH A PRODUCT DESIGNED AND PRODUCED BY ANOTHER COMPANY? ANSWER: YES, WHEN THE OTHER PRODUCT IS NECESSARY TO ENABLE THE MANUFACTURER’S PRODUCT TO FUNCTION AS INTENDED.
Matter of New York City Asbestos Litig., 2016 NY Slip Op 05063 (decided on June 28, 2016)
The Court of Appeals considered and decided two appeals involving the same issue of law. One appeal, from the First Department, was taken as of right following a 3-2 decision in the Appellate Division. In the other case, the Court granted leave to appeal an order of the Fourth Department summarily affirming the Supreme Court.
One case (Dummitt v. A.W. Chesterton) arose out of the following facts:
There was evidence that, during World War II and thereafter, defendant Crane Co. (Crane) sold valves to the United States Navy for use in high-pressure, high-temperature steam pipe systems on Navy ships. As far as the record shows, Crane’s valves did not contain asbestos or other hazardous materials. However, Crane’s valves could not practically function in a high-pressure, high-temperature steam pipe system without gaskets, insulation and packing for the valve stems, and Crane’s technical drawings for the valves specified the use of asbestos-based sealing components. Accordingly, when Crane supplied the valves to the Navy, it packaged the valves with bonnet gaskets, each of which consisted, in essence, of an asbestos disc sealed by a layer of rubber. Crane also packaged the valves with braided asbestos-based stem packing. Crane’s provision of asbestos-based components comported with Navy specifications, which called for gaskets, valves and insulation that contained asbestos.
As Crane knew, because the high temperatures and pressures in the steam pipe systems at issue caused asbestos-based gaskets and packing to wear out, Crane’s customers, including the Navy, had to replace those components with similar ones. Thus, during the period in which Crane sold these valves and related parts, the company marketed a material called “Cranite,” an asbestos-based sheet material that could be used to produce replacements for the asbestos-containing gaskets and packing originally sold with Crane’s valves. In catalogs issued between 1923 and 1962, Crane recommended Cranite gaskets, packing and insulation for use in high-temperature, high-pressure steam services. The catalogs noted that gaskets and packing composed of other materials were available. The catalogs did not indicate the temperature or pressure ratings for some of those alternative products, and it rated others only for low-temperature services, low-pressure services or both.
The other case (Suttner v. A.W. Chesterton) arose out of the following facts:
As the evidence at trial showed, in the 1930s, Crane sold its valves to General Motors (GM) for use in the high-pressure, high-temperature steam pipe systems in GM’s factories. By Crane’s own admission, it may have supplied GM with valves accompanied by asbestos-based gaskets and packing. In fact, Crane’s schematics for the valves specified the use of asbestos-based packing and gaskets.
In 1936, a Crane catalog encouraged customers to install Cranite gaskets on its valves, noting that “Cranite gaskets are used on all Crane valves for high pressure, saturated or superheated steam.” Crane’s 1955 catalog recommended the use of Cranite packing for systems that, like GM’s, featured high pressures and temperatures up to 750 degrees. As reflected in the testimony of plaintiff’s material science expert, in the 1960s and 1970s, steam pipe systems that operated within the temperature and pressure range of GM’s systems typically featured asbestos-laden gaskets. According to Crane’s interrogatory responses, in the late 1970s or early 1980s, Crane sought a substitute for the asbestos-based sealing components often included with its valves, but Crane “encountered difficulty locating suitable substitute components.” In 1943, a Crane document entitled “Piping Pointers for Industrial Maintenance” stated that metal gaskets could be installed on Crane’s valves, but it observed that “[t]his [metal] type gasket [wa]s used only in very high pressure-temperature services” in excess of 750 degrees — a temperature range above that of GM’s steam pipe systems.
Ronald Dummitt, a navy boiler technician, was diagnosed with pleural mesothelioma, which he had apparently contracted as a result of his exposure to asbestos dust. Gerald Suttner, who worked as a pipe fitter at a General Motors plant, which had a steam pipe system featuring Crane valves with third-party gaskets and packing materials, Suttner was also diagnosed with pleural mesothelioma.
A jury in the Dummitt case found Crane 99% responsible and awarded $32 million in damages.
Supreme Court remanded for a new trial of damages and the parties subsequently stipulated to a reduced damages award of $5.5 million for past pain and suffering and $2.5 million for future pain and suffering.
The Appellate Division affirmed, holding that “Crane had a duty to warn the users of its valves that the use of valves with third-party asbestos-based products could result in exposure to hazardous asbestos particles[.]”
The Court of Appeals considered the following issue:
[W]hen, if ever, a manufacturer must warn against the danger inherent in using the manufacturer’s product together with a product designed and produced by another company.
In Suttner, the jury apportioned 4% of liability to Crane and awarded a total of $3 million in damages.
The Appellate Division summarily affirmed.
The Court of Appeals began with a historical analysis:
In accordance with a longstanding and evolving common-law tradition, a manufacturer of a defective product is liable for injuries caused by the defect…Under New York’s modern approach to products liability, a product has a defect that renders the manufacturer liable for the resulting injuries if it: (1) “contains a manufacturing flaw”; (2) “is defectively designed”; or (3) “is not accompanied by adequate warnings for the use of the product”…While claims based on the third category of defect, a lack of adequate warnings, can be framed in terms of strict liability or negligence, failure-to-warn claims grounded in strict liability and negligence are functionally equivalent, as both forms of a failure-to-warn claim depend on the principles of reasonableness and public policy at the heart of any traditional negligence action[.]
In deciding whether a manufacturer has a duty to warn certain users of its product about the hazards of using that product with another company’s product, we must consider whether the manufacturer is in a superior position to know of and warn against those hazards, for in all failure-to-warn cases, this is a major determinant of the existence of the duty to warn…As we have previously recognized, “[c]ompared to purchasers and users of a product, a manufacturer is best placed to learn about post-sale defects or dangers discovered in use [and] modifications made to or misuse of a product”…A manufacturer’s superior ability to “garner information” about dangerous uses of its product extends to combined uses with other manufacturers’ products[.]
Furthermore, where one manufacturer’s product is a durable item designed for continuous use with the other manufacturer’s fungible product, which by contrast deteriorates relatively quickly and is designed to be replaced, the manufacturer of the durable product typically is in the best position to guarantee that those who use the two products together will receive a warning; the end user is more likely to interact with the durable product over an extended period of time, and hence he or she is more likely to inspect warnings on that item or in associated documentation, than to review warnings supplied by the maker of the “wear item”…[noting that, because fungible industrial materials are generally quickly replaced and repackaged by users, warnings from the manufacturers of such products are unlikely to be received by most end users]). Accordingly, because a manufacturer who learns that its product is used in conjunction with another company’s product has the knowledge and ability to warn of the dangers of the joint use of the products, especially if the other company’s product is a “wear item,” the manufacturer’s superior position to warn is a factor — though by no means dispositive — supporting the recognition of a duty to warn under certain circumstances.
Recognition of a manufacturer’s duty to warn against the certain perils of using its product with another company’s product will likely have a balanced and manageable economic impact. The manufacturer incurs a relatively modest cost from complying with the duty because the cost of issuing a warning about combined uses of its product and another product under certain circumstances is not significantly more burdensome than the manufacturer’s pre-existing duty to warn of the dangers of using the manufacturer’s product separately — a well-established cost that is itself relatively low[.]
And summarizing its holding as follows:
[T]he manufacturer of a product has a duty to warn of the danger arising from the known and reasonably foreseeable use of its product in combination with a third-party product which, as a matter of design, mechanics or economic necessity, is necessary to enable the manufacturer’s product to function as intended.
Do the Martin Act and the Executive Law permit the Attorney General to obtain permanent injunctive relief and disgorgement? Answer: Yes.
People v. Greenberg, 2016 NY Slip Op 04253 (decided on June 2, 2016)
In 2013, the Court of Appeals rejected defendants’ arguments that “no basis exist[ed] for granting equitable relief…[because] all such relief that could possibly be awarded has already been obtained in litigation brought by the Securities and Exchange Commission (SEC), which [defendants] settled in 2009.” Shortly after the Court’s prior decision, defendants made another motion for summary judgment dismissing the complaint, arguing that “the equitable relief sought was not warranted on the facts of this case [and] disgorgement is not an authorized remedy under the Martin Act or Executive Law §63 (12); and disgorgement is preempted by federal law.” Supreme Court denied the motion. The Appellate Division affirmed.
As to injunctive relief, the Court of Appeals held that:
[T]he Attorney General may obtain permanent injunctive relief under the Martin Act and Executive Law § 63 (12) upon a showing of a reasonable likelihood of a continuing violation based upon the totality of the circumstances…“This is not a ‘run of the mill’ action for an injunction, but rather one authorized by remedial legislation, brought by the Attorney General on behalf of the People of the State and for the purposes of preventing fraud and defeating exploitation”…“‘[T]he standards of the public interest not the requirements of private litigation measure the propriety and need for injunctive relief’”…Therefore, we reject defendants’ argument that the Attorney General must show irreparable harm in order to obtain a permanent injunction.
And, as to disgorgement, the Court of Appeals held that:
[D]isgorgement is an available remedy under the Martin Act and the Executive Law. The Martin Act contains a broad, residual relief clause, providing courts with the authority, in any action brought under the Act, to “grant such other and further relief as may be proper”…Indeed, this Court has previously recognized that the courts are not limited to the remedies specified under either of these statutes…In our view, disgorgement “merely requires the return of wrongfully obtained profits [and] does not result in any actual economic penalty”… As we have previously stated, in an appropriate case, disgorgement may be an available “equitable remedy distinct from restitution” under this State’s anti-fraud legislation…Nor is there any merit to defendants’ arguments that such relief is barred under the Supremacy Clause or that it was waived by the Attorney General. Moreover, as with the Attorney General’s claim for an injunction, issues of fact exist which prevent us from concluding, as a matter of law, that disgorgement is unwarranted