Taming the 5-Ton Elephant

Transcription

1 Whlesaling, June 2007 Taming the 5-Tn Elephant The Prduct Liability Issue Previusly articles in this series have extensively utlined the risks and benefits that electrical distributrs face when cnsidering private labeling. A recurrent theme in interviews with distributrs, custmers and manufacturers is the risk f prduct liability if the private labeled prduct is alleged t be defective. In additin t the prduct liability risk, the interviews als identified cncerns related t marketing supprt, research and develpment as well as administrative csts currently shuldered by the manufacturer. These csts may be incurred by the distributr that private labels. These cncerns can cntain, in many ways, legal issues that, like prduct liability, are better understd thrugh a brief legal analysis. This article highlights the legal issues related t private labeling s that distributrs can make a mre thrugh decisin prir t private labeling. The article is nt intended t give specific legal advice but is intended t highlight general legal issues that may affect the decisin t private label. Overview In general, a distributr cnsidering private label has three categries f legal stakehlders t cnsider: The manufacturer f its private labeled prducts The purchaser and end user f the prduct The general public and gvernment A prudent distributr will take the legal actins necessary t reduce r eliminate its legal risk t each stakehlder categry. Legal risks include: Prduct Liability fr Injury r Prperty Damage allegedly caused by a defective prduct; Liability fr Patent r Trademark Infringement Liability fr Cunterfeiting Prduct Liability fr Private Label Prducts Prduct liability is a majr business cncern. Accrding t insurance cnsulting firm Tillinghast in a recent Frtune article, 49,743 prduct liability lawsuits were filed in 2006 and cst businesses (and their insurance cmpanies) $261 billin. An the issue is n different in the electrical industry. Surveys cnducted by Allen Ray Assciates and Channel Marketing Grup cnsistently shw that the risk f prduct liability lawsuits is ne f the main cncerns f distributrs cntemplating private labeling. Prducts Liability is a legal actin based n an allegedly defective prduct. Under current law in virtually every state, an injured party can bring a lawsuit against any crpratin in the chain f distributin f the prduct, frm the riginal manufacturer t the retailer and every party in between. It des nt matter that the distributr may have btained the prduct in a sealed bx and sld it in a sealed bx; the distributr is ptentially liable t the injured party (the Plaintiff ) based n the legal dctrines f prduct liability. Over the years, the dctrine has been mdified and altered by the curts and legislatures. Fr example, the Texas legislature passed a statute that requires manufacturers t defend distributrs sued in prduct liability actins unless the manufacturer can prve that the distributr altered the prduct in a way that caused harm t the plaintiff. Other states have Cpyright 2007 Rbert F. Redmnd, Jr., Williams Mullen, rredmnd@williamsmullen.cm Allen Ray, Allen Ray Assciates, allen@allenray.cm David Grdn, Channel Marketing Grup, dgrdn@channelmkt.cm

2 Whlesaling, June 2007 adpted similar measures, (mst less sweeping than the Texas law.) The key element in a Plaintiff s claims against the distributr, manufacturer, retailer, etc is the cncept f Prduct Identificatin. Plaintiff must be able t allege that the prduct that caused harm was manufactured, distributed and sld by the defendants. Keep in mind that the standard fr making an allegatin in a lawsuit is very lw. If there is the slightest pssibility that the distributr defendant may have distributed the particular prduct, that is usually enugh t pass muster and allw the filing f a lawsuit. If a distributr is identified based n sales receipts frm the distributr t the end-user (cntractr r MRO accunt/installer), it may nt matter that the custmer was als buying similar r even identical prduct frm ther, unnamed distributrs. In a recent cntractr survey cnducted by Allen Ray Assciates and Channel Marketing Grup, 11% f respndents have faced prduct liability issues fr prducts they have installed. Over 70% f the time, these cases included a distributr!. When asked hw they determined which distributr sld them the prduct, custmers respnded: Invices. Purchase Orders Their name was n the prduct. I knw what I buy and frm whm I buy. Delivery receipts In essence, alleging distributr invlvement can be a lw hurdle. The states with the mst survey respndent incidences were Califrnia, Flrida, New Yrk, Pennsylvania and Texas. (Nte: The Channel Advantage Partnership s frthcming white paper n cunterfeit prducts is expected t include an appendix f the prduct liability laws in the 50 states.) The cncept behind this brad based liability is that the Plaintiff shuld nt have t srt ut wh was at fault in manufacturing, designing, selling r (ptentially) altering the prduct. That shuld be left t the defendants t determine amngst themselves thrugh agreement r thrugh a legal prcedure t shift the csts t the apprpriate party. In 90% f the cases, the Plaintiff s main claim is that the design f the prduct itself is defective and, as a result, the manufacturer (wh designed the prduct) shuld bear the burden f prving that the prduct design was nt defective. When mst manufacturing was dne in the United States, the Plaintiff wuld typically sue every participant in the chain f distributin and then the U.S. manufacturer wuld assume the defense fr all dwnstream parties. This arrangement might take place after the suit was filed by agreement f the defendants r it might take place befre any claim was made if the manufacturer agreed t include the distributr as an Additinal Insured n the manufacturer s prduct liability insurance plicy. When a manufacturer is ff-shre r bankrupt, hwever, things are cmplicated. If an ff-shre manufacturer has n U.S. peratins, it may nt be subject t suit in the United States. China r India-based manufacturers, in particular, are ntriusly hard t serve with suit papers. The same result applies t a bankrupt U.S. manufacturer. A bankrupt cmpany is all but invulnerable t lawsuits. If the ff-shre manufacturer r bankrupt U.S. manufacturer cannt be served with suit papers, then the Plaintiff brings the claims against the viable U.S. parties, typically the distributr. Distributrs have a hard time defending against defective design r manufacture claims when Cpyright 2007 Rbert F. Redmnd, Jr., Williams Mullen, rredmnd@williamsmullen.cm Allen Ray, Allen Ray Assciates, allen@allenray.cm David Grdn, Channel Marketing Grup, dgrdn@channelmkt.cm

3 Whlesaling, June 2007 design and manufacturing were dne by the ffshre manufacturer. Things becme mre cmplicated fr a private labeler (read distributr). Plaintiffs ften argue that the private labeler is an apparent manufacturer and therefre respnsible nt nly fr the prduct design and manufacture but als the warnings and package instructins. When the Plaintiff makes this type f claim, then the actual manufacturer, whether based in the U.S. r ffshre, may refuse t take ver the defense f the private label distributr. The manufacturer will argue that the Plaintiff is making a claim directly at the private label itself, nt just the prduct design. Ways t Reduce Prduct Liability Risk Cntract The best way fr a private labeler t reduce the risk f prduct liability is t include an enfrceable Indemnificatin and Defense prvisin in the Private Label cntract. That sunds simple but is, in practicality, fairly cmplicated. First, the Indemnificatin and Defense prvisin must be enfrceable. This means that the manufacturer must have nging U.S. peratins, either as a U.S. based cmpany r an ff-shre cmpany with a U.S. subsidiary. If the U.S. subsidiary is expected t prvide the prduct liability defense, then it shuld be specifically named in the Private Label cntract. As previusly mentined, if the private label prduct manufacturer is bankrupt r ff-shre with n U.S. subsidiary able t prvide the defense, then the private label distributr becmes the target defendant. The indemnificatin and defense prvisin must prvide bth indemnity (i.e. payment f an adverse jury award) and defense, (the csts f attrneys needed t defend the cmpany.) This latter cst is ften higher than the indemnity cst. Mst Indemnity and Defense prvisins in Private Label cntracts are nt well drafted. They typically use bilerplate language that makes it t easy fr a manufacturer t refuse t indemnify r defend. Fr example, the standard bilerplate indemnity prvisin des nt mentin defense csts. It simply prvides fr indemnity in the event f an adverse verdict. The distributr is left t cver its wn attrneys fees in a case that may drag n fr years. Then, if the distributr decides it is cheaper t settle than fight, the indemnity prvisin des nt reimburse the distributr fr its settlement payment (because indemnity requires a jury award, nt a settlement). Lastly, the standard bilerplate indemnity clause des nt require the manufacturer t step in and defend at the start f the case. The manufacturer has the leeway t wait until it is established that the distributr did nt alter the prduct in a way that caused harm t the Plaintiff. A prperly drafted Indemnificatin and Defense prvisin allws the distributr t turn ver the case t the manufacturer as sn as it is filed. Then, the distributr can let the manufacturer prvide the attrneys and indemnity needed t prtect the distributr. Insurance A secnd, less effective, way fr a private label distributr t limit prduct liability risk is t require that the manufacturer list the distributr as an Additinal Insured n the manufacturer s prduct liability insurance plicy. This is a less effective methd than a well-written cntractual indemnity and defense clause because: Manufacturers fail t fllw thrugh with the cmmitment t add the distributr as an additinal insured, smetimes inadvertently, ther times vertly. Cpyright 2007 Rbert F. Redmnd, Jr., Williams Mullen, rredmnd@williamsmullen.cm Allen Ray, Allen Ray Assciates, allen@allenray.cm David Grdn, Channel Marketing Grup, dgrdn@channelmkt.cm

4 Whlesaling, June 2007 The manufacturer s plicy may limit r exclude the risk f prducts liability lawsuits. The manufacturer may change insurers and nt include, r frget t include, the distributr n a later plicy. The prduct liability lawsuit may allege a distributr s independent negligence and the insurer may deny cverage based n that allegatin. The additinal insured cverage will ften be deemed excess r secndary t the distributr s (primary) prduct liability cverage and, cnsequently, the manufacturer s insurer will refuse t prvide a defense unless the distributr s carrier exhausts its plicy r ges int receivership. Fr a distributr ffering private label prducts, all f these difficulties are cmpunded by the pssibility that the manufacturer s carrier may expressly exclude private label prduct liability, especially if the manufacturer is a name-brand manufacturer! Legal Prcess The third and least effective way fr a private label distributr t limit prduct liability risk is t make a claim fr indemnity (r cntributin) in curt. These legal prcedures nly prvide a distributr limited recurse against the manufacturer fr sme prtin f an adverse jury award. They typically d nt prvide fr reimbursement f attrneys fees. The prudent distributr will prtect itself against the risk f prduct liability at the utset, when it negtiates with the private label manufacturing surce. After that pint, it may be t late. Liability fr Patent and Trademark Infringement Distributrs ffering private label brands typically develp unique labels and trademarks fr their prducts. In ding s, the distributr will need t insure that its planned trademark and labeling d nt infringe n existing marks and needs t register its trademarks and labels with the United States Patent and Trademark Office t insure maximum prtectin frm infringement. Private labeling distributrs shuld be extremely careful, and thrugh, in searching fr existing trademarks and packaging. The starting pint fr trademark search is the United States Patent and Trademark Office s database. This database identifies registered trademarks and labeling using a standard search engine. This is nt enugh, hwever. Just because a trademark is nt listed in the United States Patent and Trademark Office database des nt mean that it is nt being used smewhere in the cuntry. If a business is using a trademark and has been using it fr a perid f time, that business may have btained a cmmn law trademark. Like a cmmn law marriage, a cmmn law trademark is recgnized in the law if it is in place fr a reasnable perid f time and if the business treats the trademark as its wn. If a distributr chses a trademark that is already cvered by a cmmn law trademark, then the distributr may be liable fr trademark infringement. A distributr shuld cnduct a full trademark search which generally requires the assistance f a trademark attrney -- t be certain that its prpsed trademark des nt infringe n an existing registered r unregistered trademark. The risk f trademark infringement is substantial. If a distributr launches its private label brand and that label is later determined t infringe n an existing trademark, then the distributr will likely have t pay damages and its marked inventry destryed r re-labeled. Wrse yet, Cpyright 2007 Rbert F. Redmnd, Jr., Williams Mullen, rredmnd@williamsmullen.cm Allen Ray, Allen Ray Assciates, allen@allenray.cm David Grdn, Channel Marketing Grup, dgrdn@channelmkt.cm

5 Whlesaling, June 2007 trademark infringement claims typically are nt cvered under standard insurance plicies. Once the distributr selects a trademark and begins private labeling, it needs t insure that the private label manufacturer des nt misuse the trademark. Standard practice is t allw the private label manufacturer a limited license t print the trademark n the distributr s prducts and n ther prducts. This insures the integrity f the trademark. A distributr must als manage the risk f patent infringement. Like prduct liability claims, patent infringement claims can be brught against any party in the chain f distributin f the prduct. A distributr can and shuld insist that the manufacturer bear the risk f patent infringement lawsuits. The best way t handle that risk is thrugh cntractual indemnity the same way prduct liability risk is handled. Liability fr Cunterfeiting Sme ppnents f private labeling warn that a distributr ffering private labeled prducts culd be liable fr cunterfeiting. Technically, this is an inaccurate criticism f private labeling. Cunterfeiting is defined as the act f prducing r selling a prduct with a sham trademark that is an intentinal and calculated reprductin f the genuine trademark. Cnsequently, private labeling is, by definitin, nt cunterfeiting. infringement lawsuits n the shulders f the manufacturer. Cnclusin The Five-Tn Elephant f private labeling is in the rm. It wn t be ging away. The distributr wh wants t ride the elephant must take the legal steps t insure that its rights are prtected and risks minimized. If it des, it can be a prfitable ride. Rbert Redmnd is a partner in the Litigatin Sectin at Williams Mullen and c-chairs the firm's Cmplex Litigatin Team. He fcuses n natinal mass trt and prduct liability defense with a specialty in defending distributrs. He can be reached at (804) r rredmnd@williamsmullen.cm Allen Ray is a principal f Allen Ray Assciates, Allen Ray Assciates helps cmpanies imprve prfitability thrugh effective pricing strategies and streamlining business prcesses thrugh effective ebusiness utilizatin using custmized research. Allen can be reached at r allen@allenray.cm. David Grdn is a principal f Channel Marketing Grup. Channel Marketing Grup develps strategic planning and marketing strategies fr manufacturers and distributrs. He can be reached at r dgrdn@channelmkt.cm. Thse wh warn f cunterfeiting are actually warning f patent infringement. The manufacture and sale f a prduct whse design and peratin f which is cvered by a patent r patent applicatin held by anther cmpany culd create the risk f patent infringement. As discussed abve, a distributr must vigilant abut the patent status f the prducts it intends t purchase frm the private label manufacturer and shuld place the burden f defending patent Cpyright 2007 Rbert F. Redmnd, Jr., Williams Mullen, rredmnd@williamsmullen.cm Allen Ray, Allen Ray Assciates, allen@allenray.cm David Grdn, Channel Marketing Grup, dgrdn@channelmkt.cm