10.07.2021 A Primer on Statutory Protections for Intermediary Sellers in Toxic Tort Cases
Consider the following hypothetical: for the last decade, Distributor, Inc., had great success selling Acme Co. widgets. The widgets are a useful consumer product, previously deemed safe for household use around kids and pets, but...according to a new EPA study, contain carcinogens that leach into groundwater. Personal injury and property damage lawsuits centered on the widgets and similar products are suddenly popping up around the country. As a distributor, what exposure does Distributor, Inc. face in these lawsuits? It depends on a lot of factors, the foremost being whether Distributor, Inc., has a sound indemnity agreement with Acme Co. In large part, it also depends upon the law of the state in which each case is pending.
To the second point, regarding state law, several states have enacted “innocent-seller statutes” that will shield an intermediary product distributor from liability for harm caused by a product that the distributor merely sold downstream. These statutes serve as an independent basis for summary judgment in favor of a distributor by establishing that the distributor cannot be held liable under certain products liability theories unless the distributor was involved in the design or manufacture of the product at issue, modified the product, knew or had reason to know of the alleged defect prior to sale, or made promises about the product’s quality or capabilities. Certain states also have enacted seller-indemnity statutes, under which a product manufacturer owes a distributor indemnity for costs incurred in defending products liability claims involving the manufacturer’s products. These distributor-protective laws vary widely from state to state, but where they are available, they provide invaluable protection against product liability claims.
Innocent-seller statutes typically address one or more of the three theories of products liability: (1) negligence – which is based on the defendant’s unreasonable failure to design, manufacture, or warn about a known or knowable risk in a product; (2) strict liability – which imposes liability for harm caused by an inherently dangerous product against the product’s designer and manufacturer, who are considered to be in a better position than the consumer to assess and address the danger; and (3) breach of warranty – which arises out of a defendant’s express or implied promise relating to the product’s quality or performance.
The logic underpinning innocent-seller statutes is that, where a distributor is not involved in a product’s design or manufacture and did not modify the product, but simply sold it downstream, the elements of negligence and strict liability cannot be established against the distributor. A negligence claim against a “mere distributor” fails because the distributor had no way of knowing of the alleged design or manufacturing defect. It is essentially a consumer itself, and since it did not design or manufacture the product, it owes no duty of care related to the product. Equally, a strict liability claim fails on similar grounds because the distributor is in the same position as the consumer in the ability to know the risks inherent in the product’s design or manufacture. Imposing strict liability on the distributor when it had no way of knowing the risks attendant to the product’s design is inconsistent with the bases for strict liability against the manufacturer.
As it pertains to warranty claims, these statutes often make clear that, unless the plaintiff can show that the distributor made some affirmation of fact about the product’s quality or capabilities, or failed to exclude implied warranties under the Uniform Commercial Code, there is no basis for a breach of warranty claim against the distributor. Therefore, distributors should always conspicuously and unambiguously exclude implied warranties, if allowed under applicable law.
States vary in terms of the breadth of their innocent-seller statutes. While over half of the states have enacted an innocent-seller statute in one form or another, only twelve states provide complete protection against all three product liability claims (Alabama, Colorado, Delaware, Idaho, Illinois, Kansas, Maryland, Mississippi, Missouri, North Dakota, Tennessee, and Utah). The remainder of states with innocent-seller statutes provide only partial protection against one or two theories of liability, with strict liability being most commonly precluded. Even in these states, however, a distributor may still seek summary judgment based on the plaintiff’s inability to prove certain elements of her case, such as when the distributor expressly excluded all warranties, or was not involved in the design or manufacture of the product.
Conversely, several states’ innocent-seller statutes are triggered only where the original manufacturer can be sued in the case at hand; so where the manufacturer is overseas, cannot be served, or has dissolved, the statutory protection may not be available to the distributor. Regardless of these limitations on innocent-seller statutes, it is important to be familiar with them in every state into which a distributor client sells products.
In addition to (or sometimes in lieu of) innocent-seller statutes, several states provide distributors a statutory right to indemnity from product manufacturers. While less optimal than an innocent-seller statute, in that they do not serve to bar claims against the distributor, these statutes provide a right to recover costs incurred in defending against those claims. Where the parties have not previously established indemnity as a matter of contract, or where equitable indemnity is unavailable, these statutes provide absolute clarity on the question of who, between the distributor and the manufacturer, ultimately bears responsibility for harms caused by the manufacturer’s products.
Circling back to Distributor, Inc.’s case – the best method by which Distributor, Inc., might have limited its potential exposure in the widget litigation would have been through contractual allocation of risk with Acme Co. via a sound indemnity provision covering product liability claims against Distributor, Inc. However, in the event that contractual indemnity from Acme Co. is not forthcoming, Distributor, Inc.’s next step should be to look into whether an innocent-seller statute or seller-indemnity statute is available, and then move toward building a record in support of summary judgment based on the applicable state statute.