Protecting Business Interests on Exports to the United States

The United States is an attractive market in which to conduct business. The ease of communication and travel and the similarities in business cultures facilitate a British exporter's potential business opportunities there.

The purpose of this article is to highlight one area — product liability — where the legal environment is dangerously different from the legal environment in which British exporters live. The U.S. legal environment is not xenophobic, merely different; American businesses work successfully in this environment day in and day out.

The Legal Structure

The United States consists of one federal jurisdiction and the jurisdictions of the 50 states and the District of Columbia. The federal government and the state governments each have their own legislative, executive and judicial bodies, each of which, respectively, passes laws, implements laws and adjudicates disputes concerning the application of laws. A great deal of law evolves from the decisions of the federal and state courts. A startling example of this type of development was the introduction of the concept of strict liability for defective products into the U.S. legal system in 1963 by analogy to a principle of 17th century English law.

The general rule is that states have jurisdiction over all areas of regulation not ceded to the federal government in the U.S. Constitution, but federal and state laws often affect different aspects of the same area of law, e.g., product liability. Sometimes those jurisdictions overlap; that dual exercise of authority can lead to conflicts, and those conflicts have to be ironed out in the courts. An example of this conflict in U.S. product liability law involves the question of whether, when a federal agency requires a certain form of safety labeling on a product, a manufacturer can be liable under state law for failure to adequately warn when using only the federally mandated form of warning.

The potential diversity of state laws has long been seen as an impediment to the free flow of commerce across the United States. One approach to the reduction of this risk has been the periodic authoritative publications of statements of particular areas of law. In 1997, the Restatement of the Law (Third), Torts: Product Liability (Restatement (3rd)) was published. This publication was widely seen as representing a more conservative statement of U.S. product liability principles. Its advocates hope that this Restatement will be incorporated into the laws of virtually every state, just as §402A of its predecessor became the nucleus of states' laws of product liability. In particular, the 3rd Restatement provides definitions and standards for liability on the basis of manufacturing, design and warning defects, areas not explained in the predecessor Restatement. For example, one innovation made in this Restatement has been to shift to a plaintiff alleging defective design in a product liability lawsuit of the burden of demonstrating that there was an alternative design and that the failure to use that alternative design rendered the product not reasonably safe, and the designer therefore liable.

Practical Principles

Product liability can arise in the United States under a number of different legal theories, many of which are similar to those concepts in the United Kingdom: negligence, breach of warranty and strict liability. Without going into the details of these different causes of action, a number of broad principles have evolved from U.S. court rulings and laws on the subject of product liability.

• A manufacturer has an obligation to use reasonable care in the design, manufacture, marketing and sale of its product or service. This behooves a manufacturer to carefully consider alternatives when it evaluates and determines the final form and manner in which a product appears in the U.S. market. A manufacturer that chooses cost-efficiency over safety issues in this process is risking exposure to product liability in the United States.
• A manufacturer should take steps to avoid selling products that are unreasonably dangerous for their intended purpose. It is an accepted principle that some products will be dangerous by their very nature. A careful manufacturer will plan to be able to demonstrate later that it made decisions affecting design, manufacturing and marketing that were reasonable in the circumstances. If later developments occur that make what was decided previously look "unreasonable" currently, a manufacturer may have an obligation to take remedial steps.
• A manufacturer must ensure that statements made about its products are accurate and complete. A manufacturer also has an obligation to ensure that the product literature adequately instructs the user about safe use of the product and effectively warns the user against the specific risks of harm if that product is used improperly. Increasingly, product literature is considered to be part of the product itself; if the product literature is inadequate, the product itself will be considered to be defective and the manufacturer will be at risk.

These obligations are evaluated by U.S. principles, most often by U.S. juries, when there is a lawsuit based on a product causing harm in the United States. American courts often have perspectives on these matters that are very different from those in the United Kingdom. One common misconception of British manufacturers is that proof that a product satisfies all applicable U.S. industrial and technical standards will be a defense to a product liability lawsuit. That is not so. A plaintiff is entitled to prove that the product was defective because it did not have some additional feature or meet some higher specification.

Some manufacturers are troubled by having to manufacture to one product standard for sales in the European Union and to another, sometimes lower, product standard for sales in the United States. Production for U.S. sales may therefore be more cost-effective, but a manufacturer whose product meets different and higher standards outside the United States than the product it markets in the United States may be at risk of a claim in a U.S. court that it cared more about cost than safety.

Structure of Sale

U.S. courts generally are empowered by their own rules and applicable laws to exercise jurisdiction, that is, the power to hear a case, when the defendant is located in another territory, be it another state of the United States or in another country altogether. While there are differences among the U.S. federal and various state laws on this point, very broadly, U.S. courts will have the power to require a defendant located outside the United States to respond to a product liability complaint filed there if the defendant placed the product in the "stream of commerce" with an awareness that it might end up in the United States.

British courts do not recognise the full extent of the exercise of this "extraterritorial jurisdiction" by American courts. In the leading English case on this point, both the trial court and the appellate court refused to recognise the validity of the American court judgment at all. This difference in approach suggests that a British defendant may have available to it a "Fortress Britain" defense, by which it ignores the American court proceeding and abandons the U.S. market, but it is a brave defendant that follows that high risk strategy.

Given the scope of the extraterritorial jurisdiction exercised by American courts, the establishment of intermediate companies through which U.S. sales are effected will not insulate the companies located outside the United States at which the U.S. claim is aimed — the company or companies ultimately responsible for product design, product manufacture and/or product marketing. Rather, the most effective defense to U.S. product liability lawsuits comes from taking effective steps to reduce the risks in those areas of potential liability.

Risk Reduction Steps

An exporter preparing to sell products into the United States can take any of a number of significant steps to reduce its potential U.S. product liability exposure. These steps include reviewing and understanding the implications of the manner in which its products are marketed and sold in the United States and asserting such controls as it can to ensure that its risks are reduced. For example:

• An American plaintiff has great latitude to review a defendant company's records and to interview the company's employees under oath in order to build its case. A careful manufacturer will have established and consistently applied document-creation, document-retention and document-destruction policies.
• A lawsuit in the United States could result in all of a company's records becoming available to a plaintiff for use in making a case against the manufacturer. A manufacturer should therefore carefully review the documents that it does or does not currently have in its possession to describe the decisions affecting how and why its products were designed, manufactured and marketed. Equally important are records of what alternatives were considered and the reasons why they were rejected.
• One of the greatest risks of a U.S. product liability lawsuit is the threat of punitive damages, which are designed to punish the defendant and therefore can be significantly larger than those for compensatory damages. A common source of that risk is the failure of a manufacturer to recognise and react adequately to information in its possession about potential and actual problems with the product. A companywide commitment to safe products and established systems to ensure that safety is appropriately considered at all stages, especially in connection with field complaints about the product, will go a long way toward reducing the risk of punitive damages.
• The labels, warnings and instruction manuals associated with its product should be reviewed to ensure that they meet U.S. product standards. Failure to meet applicable U.S. standards will allow a plaintiff to make out a case of liability that a manufacturer may have great trouble defending. U.S. technical standards can often be difficult to locate, but the U.S. Department of Commerce has made an effort to collate U.S. product standards at the following Internet website: www.ntis.gov/standards. The Technical Help for Exporters division of the British Standards Institute can also provide information on U.S. standards.
• The labels, warnings and instruction manuals should also be reviewed to ensure that they will satisfy U.S. standards of legal sufficiency. They must be written and presented in such a way as to adequately warn of the hazards of misuse and effectively instruct on the safe use of the product. Some manufacturers start this process with the first literature that purchasers see, the marketing literature.
• When satisfied that the labels, warnings and instruction manuals meet the relevant requirements, a careful manufacturer will want to take steps to ensure that those labels, warnings and instruction manuals are effectively communicated to the ultimate purchaser. Since an injured party can sue directly anyone in the marketing chain, including the manufacturer, a written agreement is an ideal opportunity to obligate a U.S. agent or distributor to undertake the obligation to effectively communicate this information. After all, it is in the agent's or distributor's interest also that the risk of product liability lawsuits be reduced.
• While liability for personal injury and death can not be disclaimed in U.S. contracts, liability for commercial harm can be. British law is comparable to that in the United States in this area, but U.S. law requires that an exclusion of liability be conspicuous and specifically refer to the warranties otherwise implied by law in order to be effective. A careful exporter to the United States will ensure that its terms and conditions for U.S. sales conform to applicable U.S. legal principles.
• Much of the threat of U.S. product liability laws can be reduced by a better knowledge of what those risks are and the pro-active steps a careful exporter can take to reduce them. Insurance also can play a useful part in reducing ultimate liability, but the market fluctuates from time to time in terms of the amount, type and price of insurance cover for products going to the United States. Generally, insurers are wary of liabilities arising in the United States and either exclude or limit their coverage or require special or larger premiums to provide cover. An exporter should carefully review its current product liability insurance policy to understand clearly what cover it currently would or would not have in relation to its potential liability if its products or services were to cause harm in the United States.

The U.S. market is one of the most vibrant and challenging markets in the world. Successful exploitation of the opportunities presented by this market can flow from advance planning. Understanding the peculiarities of the American legal environment and taking steps to reduce the special risks of that environment should be a part of that planning process.