CROSSING THE LINE: CROSS-BORDER PRODUCT LIABILITY LAWSUITS RELEVANT ISSUES FOR CORPORATE DEFENDANTS. By Peter J. Pliszka *

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1 INTRODUCTION CROSSING THE LINE: CROSS-BORDER PRODUCT LIABILITY LAWSUITS RELEVANT ISSUES FOR CORPORATE DEFENDANTS By Peter J. Pliszka * The landscape of Canadian private international law has undergone substantial transformation over the past decade. This development reflects a significant change in Canadian judicial attitudes toward legitimate exercises of jurisdiction by foreign courts and the appropriate extent of a Canadian court s reach towards foreign parties. Through the 1990s and into the 21st century, Canadian courts have largely abandoned traditional Anglo-centric common law notions of extra-territorial extensions of jurisdiction, and instead have actively embraced the doctrine of international judicial comity i.e. acceptance of appropriate limits on the extent of their own jurisdiction and corresponding respect and recognition of legitimate exercises of jurisdiction by foreign courts over Canadian parties. This development is particularly relevant for product liability litigation. As commerce has become increasingly globalized over the past decade, Canadian and U.S. producers and distributors are selling more and more of their products abroad. With the adoption of NAFTA, the amount of cross-border trade between Canada and the U.S. has proliferated. Where there is the sale of products, there is potential for product liability lawsuits, and those lawsuits do not necessarily occur in the manufacturer s home-jurisdiction. Consistent with the above-noted doctrine of judicial comity, many courts accept the concept that when a manufacturer releases its products into the normal channels of trade, the court of the territory where the manufacturer knew or could reasonably foresee that its product would be purchased, used or consumed may be entitled to take jurisdiction over a claim for damage sufferred in that territory as a result of an alleged defect in the product. Consequently, Canadian manufacturers and distributors face an increasing prospect of being named as defendants in product liability lawsuits in the U.S., and vice versa for U.S. manufacturers and distributors who sell into the Canadian market. Given this reality, it is * Peter J. Pliszka is a partner in the Toronto office of Fasken Martineau DuMoulin LLP. Peter acts as trial and appellate counsel in a broad range of civil and commercial litigation matters before all levels of court in Ontario and the Supreme Court of Canada. Peter has extensive experience in product liability-related proceedings involving a wide variety of products and equipment, including motor vehicles, elevators, fighter-jet components, industrial resins, high-speed passenger trains, cellular telephones and medical devices. In 2002, Peter was inducted as a member in Product Liability Advisory Council, a U.S.-based defence-oriented organization for inhouse counsel and outside litigation counsel who specialize in product liability litigation. Peter has frequently represented both Canadian and foreign companies from the U.S., Europe and Japan in inter-jurisdictional litigation disputes. Peter can be contacted at (416) or at ppliszka@tor.fasken.com.

2 Page 2 important for corporations on both sides of the border to understand the similarities and differences between the Canadian legal system and the U.S. legal system. Both the Canadian legal system and U.S. legal system 1 trace their roots back to the common law legal system which both countries inherited from England. Given this common heritage, the two systems share many common features. Over the years, however, a number of significant differences between the two countries legal systems have developed. These differences relate to both procedural and substantive rights of parties. As such, these differences can have a significant effect on corporations that may be pulled into the other country s legal system. This paper will highlight six of the more prominent differences between the Canadian legal system 2 and the U.S. legal system 3. These differences are: 1. General damages; 2. Punitive damages; 3. Requirement to post security as a condition to appealing a trial judgment; 4. Potential for costs awards; 5. Pre-trial examinations for discovery; and 6. Legal test for determining liability It must be noted that there is no singular U.S. legal system with one set of courts applying one common set of procedural and substantive laws. Rather, the United States civil justice system comprises a multitude of courts with varying areas of jurisdiction, procedures and rules. In brief, there is a federal court system and a state court system, and there is some overlap in the subject-matter jurisdiction of these two systems. The federal court system includes the U.S. Supreme Court, twelve Federal Courts of Appeal of Plenary (i.e. general) jurisdiction, and 94 Federal District Courts. Some federal judicial districts span one or more entire states, while some of the larger states encompass several judicial districts. Each state also has a state court system. Generally, the state court system comprises superior trial courts of record and an appellate court; in many states there is also an intermediate appellate court. In addition, there are various courts of specialized subject-matter jurisdiction under both the Federal court system and the state court system. For the sake of simplicity, this paper will discuss elements of U.S. litigation in terms of generalities. However, any reader with a question regarding a particular issue or a particular jurisdiction in the U.S. should seek specific legal advice about that issue or jurisdiction. The procedural and substantive laws relating to the topics discussed in this paper are largely (although not entirely) the same among the 9 Anglo-Canadian provinces, but there are some differences in the 10 th province Quebec, which is a Civil Law jurisdiction. For the sake of simplicity, this paper will treat the province of Ontario, which is Canada s largest and most populous province, as an exemplar of the Canadian legal system for the purpose of discussing the contrast with the U.S. legal system. Some of the information about the U.S. law on topic #2 (punitive damages), topic #5 (Examinations for discovery) and Footnote #1 discussed in this paper is derived from a paper by Elizabeth S. Stong entitled A Road Map for Selected Aspects of U.S. Litigation, which Ms. Stong presented in a panel discussion on Cross- Border Litigation A Primer for In-House Counsel at a conference of the Canadian Corporate Counsel Association in April, 2002 in Ottawa. Ms. Stong is a partner in the litigation department at Willkie Farr & Gallagher in New York City.

3 Page 3 1. GENERAL DAMAGES General Damages refers to non-pecuniary losses such as pain and suffering, reduction of life expectancy, loss of enjoyment of life, etc. In a series of three catastrophic personal injury cases in 1978, which came to be known as the Damages Trilogy, the Supreme Court of Canada ruled that non-pecuniary general damages for personal injuries should not exceed $100,000 per claimant, except in exceptional cases 4. This ruling has subsequently been accepted by Canadian courts as a cap for general damages, that may be exceeded only in the rarest of circumstances. Adjusting for inflation since 1978, the cap has risen to just over $300,000 per claimant. (Note that this cap applies only to non-pecuniary general damages. It does not apply to pecuniary damages, which refers to compensation for economic losses such as loss of future income, cost of future care and out-of-pocket expenses.) The Supreme Court of Canada s policy reasoning for the general damages cap is that it provides a rational justification and stable basis across Canada for non-pecuniary compensation in personal injury cases, and it reflects a recognition that non-pecuniary losses are incapable of direct replacement by money. Essentially, the cap is a judicially-developed device designed to prevent excessive and unpredictable damages awards for non-pecuniary losses, and the corresponding burden upon others which can follow from such awards (e.g. the flowing through of the cost of such awards from companies to consumers at large, or from insurers to all of their policyholders). Generally, jurisdictions in the United States do not impose a cap on general non-pecuniary damages. Rather, general damages are left to be assessed at the discretion of the trier of fact (which, almost invariably in U.S. product liability trials, is a jury). As such, certainly in theory, and sometimes in practice, it appears that the sky s the limit for general damage awards in some U.S. jurisdictions, at least at the trial stage. (Often, however, the most sensationally high damages awards of U.S. juries are reduced on appeal, although the ultimate general damages awards in U.S. lawsuits still tend to be higher than those in Canada.) 4 Andrews v. Grand & Toy Alberta, [1978] 2 S.C.R. 229; Arnold v. Teno, [1978] 2 S.C.R. 287; Thornton v. Prince George School District No. 57, [1978] 2 S.C.R. 267.

4 Page 4 2. PUNITIVE DAMAGES Awards of punitive damages by Ontario courts are relatively infrequent, and tend to be even more modest than general damages awards. Although there is not an explicit cap on punitive damages awards, the Supreme Court of Canada recently held in the context of a bad faith insurance adjusting case involving very egregious facts that $1,000,000 is the upper end of the acceptable range for punitive damage awards in private causes of action, and indicated that only the most exceptional case should qualify for a punitive damages award above that amount. 5 On at least one occasion since that ruling, an Ontario jury has awarded punitive damages that exceeded $1,000, That judgment has been appealed to the Ontario Court of Appeal. Punitive damages in many U.S. jurisdictions are not subject to a cap, and punitive damage awards in the U.S. tend to be substantially higher then those awarded by Canadian courts. Indeed, punitive damage awards are often regarded as the most extreme example of what is wrong with the U.S. civil justice system. This perception is fed by the occasional multi-million (or even multi-billion) dollar punitive damage awards that garner substantial media headlines and exposure. However, it is important to note that it is not uncommon for such excessive punitive damage awards to be reduced on appeal. In fact, in 1996, the U.S. Supreme Court attempted to inject some moderation into the assessment of punitive damages in product liability cases in BMW of North America v. Gore 7. There, BMW had failed to advise its dealers (and through them, its customers) that certain new cars had incurred some pre-delivery damage. The plaintiff had purchased a new BMW car, but he subsequently discovered that the car had been repainted before he had purchased it. The plaintiff alleged that this had reduced the car s value by approximately 10% of the purchase price (approximately US$4,000), and he sued BMW for compensation. The plaintiff succeeded at trial, and the jury awarded him compensatory damages of U.S.$4,000, representing the estimated reduced value of the car. In addition, however, the jury awarded the plaintiff punitive damages in the amount of US$4 million Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 59 Mazza v. Hamilton Township Farmers Mutual Fire Insurance Company, July 16, 2003; Superior Court of Justice of Ontario; There, the jury awarded punitive damages in the amount of $2.5 million. 517 U.S. 559 (1996) (U.S.S.C.)

5 Page 5 BMW appealed to the Alabama Supreme Court. On appeal, the Court reduced the punitive damages award to US$2 million. On further appeal, the U.S. Supreme Court held that US$2 million was grossly excessive for this case. In brief, the Court found that that award of punitive damages was so wholly disproportionate to both the degree of reprehensibility of BMW s conduct as well as the actual injury suffered by the plaintiff that it violated the Due Process Clause of the Fourteenth Amendment of the U.S. Constitution, which prohibits the imposition of grossly execessive or arbitrary punishments on a tortfeasor (i.e., to the extent an award is grossly excessive, it constitutes an arbitrary deprivation of property without due process). On April 7, 2003, the U.S. Supreme Court released a much-anticipated decision which reinforced its ruling in the BMW case State Farm Mutual Automobile Insurance Company v. Campbell 8. Campbell had been sued by another driver following an automobile collision. Campbell s automobile insurer, State Farm, conducted Campbell s defence in that action, pursuant to its obligation under the automobile insurance policy which it had sold to Campbell. The plaintiff in that action made an offer to settle the claim against Campbell on terms that the plaintiff receive a payment of US$50,000, which was the limit on Campbell s policy. State Farm refused to accept the plaintiff s offer. Instead, State Farm took the case to trial, and lost. The jury awarded the plaintiff damages in the amount of US$185,000. Initially, State Farm threatened to require Campbell to pay the portion of that judgment which exceed his US$50,000 policy limit. State Farm eventually relented and paid the entirety of the judgment. However, Campbell sued State Farm, alleging that it had acted in bad faith. A Utah jury found State Farm liable for bad faith, fraud and intentional infliction of emotional distress upon Campbell. The jury awarded Campbell compensatory damages in the amount of US$2.6 million, and punitive damages in the amount of US$145 million. The trial court reduced these amounts to US$1 million and US$25 million, respectively. However, the Utah Supreme Court reinstated the US$145 million punitive damages award. On further appeal, the U.S. Supreme Court applied its ruling in BMW v. Gore and overturned the punitive damages award. The Court held that the punitive damages award was unconstitutionally excessive for a case that yielded only US$1 million in compensatory damages. The U.S. Supreme Court commented that punitive damage awards that represent single digit multiples of compensatory damage awards are more likely to fit the due process constitutional requirement than the 145:1 ratio of punitive damages to compensatory damages which was awarded by the Utah court. 8 State Farm Mutual Automobile Insurance Co. v. Campbell [ ], April 7, 2003 (U.S.S.C.)

6 Page 6 Although this moderation introduced by the U.S. Supreme Court is welcome news to corporations, the fact remains that U.S. punitive damages awards continue to dwarf those made by Canadian courts in terms of both frequency and magnitude. 3. SECURITY-POSTING CONDITIONS FOR EXERCISING RIGHT OF APPEAL Under Ontario court rules, an order or judgment for the payment of money is automatically stayed upon the filing of a notice of appeal. Ontario courts have jurisdiction to waive this stay, and order an appellant to post security as a pre-condition to proceeding with an appeal. However, such orders are not common, and the typical practice is that an appellant is not required to post security for an appeal. In some state jurisdictions in the U.S., the appellant is required to post a bond for the full amount of the judgment, or a substantial portion thereof, as a condition to bringing an appeal. In some cases, this may not be an unduly onerous burden for the appellant to meet. However, consider the sensational cases involving astronomic damage awards. Even some of the largest and best known corporations may have difficulty posting security in those amounts. A case which illustrates this point perfectly is currently before the Illinois court. In March, 2003, an Illinois county court judge held that Philip Morris U.S.A. (the largest U.S. cigarette maker) had deceived smokers about the danger of light cigarattes over a number of years, and he awarded damages against Philip Morris of US$10 billion. Philip Morris sought to appeal the trial judgment, but the Illinois court rules required it to post security for the entire amount of the judgment as a condition of bringing the appeal. Philip Morris asked the court to reduce this requirement, claiming that trying to post that amount of security for the appeal could potentially push the company into bankruptcy. The trial judge agreed to reduce the security requirement to approximately US$6 billion. However, on July 14, 2003, the Illinois intermediate appellate court ruled that the trial judge lacked jurisdiction to reduce the amount of the bond. Accordingly, the trial judge reinstated the original US$12 billion bond requirement. Philip Morris appealed further. The Illinois Supreme Court set aside that order, with the good news for Philip Morris being that it was now required to post only US$6.8 billion as security to appeal the class action verdict.

7 Page 7 4. COSTS AWARDS Although costs awards are ultimately in the discretion of the trial judge, the near-universal practice among Ontario courts is to award costs in the cause i.e. costs (in Canada, costs refers to both lawyer fees and disbusements) are awarded to the successful party in the lawsuit. Typically, this means that the party that loses the lawsuit must pay some portion of the legal fees which the winning party incurred in conducting the lawsuit. The quantum of costs recovery depends on various court tariffs and practice guidelines of the court; while the amount of the costs award seldom equates to full indemnification of the legal fees which were actually incurred by the winning party, it usually is still a substantial sum of money, given the high cost of litigating a case to trial. In many U.S. jurisdictions, there is little if any prospect of an award of attorney fees in a product liability lawsuit. It has been speculated that this may be one reason for the relatively higher number of lawsuits in the U.S.; the theory is that the risk of exposure to a costs award under Canadian practice serves as a significant deterrent to frivolous nuisance lawsuits. 5. PRE-TRIAL EXAMINATION FOR DISCOVERY Each party to a lawsuit in Ontario is entitled to conduct an examination for discovery (a deposition in U.S. legal parlance) of the opposing party. Where the opposing party is a corporation (which usually is the defendant in a product liability lawsuit), the opposing party is entitled to conduct an examination for discovery of only one representative of the corporation. Thus, even though a typical product liability lawsuit will involve numerous employees of the defendant-corporation who have relevant knowledge of the subject-matter in issue (e.g. engineers who designed the product, technical and marketing personnel who prepared the product packaging and literature, individuals who were involved in the manufacturing process, etc.), the plaintiff s counsel is limited to examining only one of those people, unless the plaintiff s counsel is able to obtain a court order requiring other representatives to be examined for discovery. The threshold to obtain such an order is high, and our courts do not grant such orders often. Further, Ontario court rules do not permit a party to conduct an examination for discovery of non-party witnesses without a court order specifically allowing them to do so. Once again, such orders are not granted often.

8 Page 8 The breadth, and consequent cost, of pre-trial discovery in U.S. litigation is substantial. In many U.S. jurisdictions, there is no set limit on the number of people whom a party may depose (i.e. examine for discovery) in a lawsuit. Rather, in most jurisdictions in the U.S. a party is entitled to depose any number of representatives of a corporate party. Further, a party is entitled to depose a person, whether that person is a party to the lawsuit or a non-party witness. Consequently, pre-trial discovery in the U.S. can become substantially burdensome and expensive to a corporation if the plaintiff s counsel chooses to require a substantial number of employees to sit through countless hours of discovery. 6. LEGAL TEST OF LIABILITY - NEGLIGENCE v. STRICT LIABILITY Product liability law in Ontario is not codified by any statute. Rather, it remains governed by the common law of the tort of negligence. Generally, under the tort of negligence in a product liability lawsuit, the plaintiff must establish that the defendant s product is defective, and that the defendant failed to meet the standard of reasonable care in preventing the defect. In this regard, an allegation of product defect will usually take one of three forms a manufacturing defect, a design defect or a warning defect. A manufacturing defect occurs when the specific product departs from the manufacturer s intended design of that product. A design defect occurs when the foreseeable risks of harm posed by the product could have been reduced or avoided by the adoption of a reasonable alternative design, the omission of which has rendered the product not reasonably safe. A warning defect occurs when the foreseeable risks of harm posed by the use of the product could have been reduced or avoided by the provision of reasonable instructions or warnings, the omission of which has rendered the product not reasonably safe. Under Ontario common law, the standard of reasonable care applies to product liability claims; the defendant will be liable only if the court is satisfied on a balance of probabilities that the defendant failed to act reasonably. In other words, liability does not necessarily flow from the fact that there was a defect in the manufacture of the product. Rather, the court must also be satisfied that the manufacturer failed to take all reasonable steps to guard against the product being manufactured with that defect. The U.S. law on product liability is a patchwork of statutes and common law across the United States. Some, but not all, states have enacted statutes which impose strict liability upon manufacturers and/or sellers of products for manufacturing defects (i.e. a physical departure from

9 Page 9 the intended design of a product). A strict liability regime can take many different shapes. Generally, however, it implies a no fault rule that can impose liability upon a manufacturer for a defect in a product whether or not the manufacturer acted reasonably. For example, under a typical strict liability regime, the due diligence defence would not be available to the defendant. This means that if the plaintiff shows that the product had a defect, the manufacturer may be liable even if it had taken all possible care to prevent that manufacturing defect e.g. through its quality control processes, etc. Note, however, that other defences would usually remain open to the defendant e.g., the defendant is still entitled to assert as a defence that the defect did not cause the plaintiff s injury, the plaintiff misused or altered the product, a third party contributed to the harm, etc. CONCLUSION The foregoing are just some of the differences between the legal system of Ontario and that of many U.S. jurisdictions. The precise nature and extent of the differences will vary depending upon the particular U.S. jurisdiction in question. Similarly, the significance of any of these differences in a given case will vary depending upon the particular facts of the case. It is important to note that the plaintiff does not have an absolute right of choice over the forum for a lawsuit; there are various bases on which a defendant can seek to challenge the plaintiff s chosen jurisdiction. Obviously, the types of differences discussed in this paper can potentially have a profound impact on the result of a lawsuit. Therefore, these types of issues should be investigated thoroughly at the outset of a lawsuit before taking any steps which could be construed as a submission to the plaintiff s chosen jurisdiction.