UK: US Product Liability and Criminal Sanctions

Last Updated: 11 August 2003

The recent Ford/Firestone litigation in the US, relating to the alleged defectiveness of certain of Firestone’s tyres, coupled with the corporate shock waves still reverberating within the US as a result of Enron’s collapse, has resulted in the US Congress placing a greater emphasis on corporate accountability.

Legislation is now in the process of being introduced within the US, with proposals to criminalise the manufacture and distribution of defective products, and to penalise corporate officers and directors of such companies for the design and distribution of such products. The proposed legislation includes large fines and/or imprisonment for knowingly introducing a defective product onto the market. Clearly, the implications of this proposed legislation are far reaching, not only in relation to the risk management activities which will need to be reviewed by US manufacturers (or European-based manufacturers with US subsidiaries), but also in relation to both product and directors and officers’ liability insurers.

On 1 November 2000, the Transportation Recall Enhancement Accountability and Documentation Act was signed into law by President Clinton. The Act imposed stiff criminal penalties on any officer or director of a motor vehicle manufacturer who made a false or misleading statement with the specific intent to mislead the US Secretary of Transportation about a defect in the company’s products that may cause death or serious bodily injury. Penalties for breach of this particular legislation include criminal fines, or imprisonment of up to 15 years or both.

Following that Act’s introduction, several further (and more wide-reaching) Bills were brought before Congress which, once enacted, will impose criminal sanctions on corporations, corporate officers and directors for knowingly manufacturing and distributing defective products. By way of example, the proposed Defective Products Penalty Act 2000 would make it a Federal criminal offence knowingly to manufacture and distribute:-

‘’A product with some flaw in design, manufacture, assembly or instruction that renders the product dangerous to human life and limb beyond the reasonable and accepted risk associated with such or similar products lacking such a flaw’’.

Similarly, the proposed Motor Vehicle and Motor Vehicle Equipment Defect Notification Improvement Act 2000, would establish criminal penalties against manufacturers that knowingly introduce onto the market place any motor vehicle or motor vehicle equipment with a defect that causes death or serious injuries.

In respect of both proposed items of legislation, manufacturers would be subject to criminal penalties, including large criminal fines and/or imprisonment for knowingly introducing a defective product onto the market place.

Clearly, in light of these proposals, it is imperative that US based manufacturers (or European subsidiaries) re-visit the methodology utilised when considering risk in product development decisions, reviewing the framework currently adopted for properly documenting all product development activities. In an ideal world, this process should also be undertaken in conjunction with the manufacturer’s product and D & O liability insurers. As a result of this review process, a manufacturer should be able to demonstrate that it has a careful and thoughtful approach to introducing its products onto the market place, thereby avoiding potential civil actions, as well as the imposition of potential criminal liability, within the US.

It is self ’-evident (but nevertheless worth repeating) that competent risk management requires that a manufacturer must recognise the importance of designating an individual at a high level within the company with the responsibility for risk management and reporting. That individual would then be capable of identifying the factors that give rise to risk, and notifying the company’s employees of the fundamental importance of recognising and addressing these factors in all product manufacturing decisions.

Such factors which ought to be taken into account during the course of the risk management process include, but are not limited to, the following:-

(i) An early assessment of the materials that are to be used in the manufacturing of any particular product;

(ii) the warnings which will accompany that product;

(iii) the information that should be included in the instruction manual;

(iv) the tests which need to be undertaken;

(v) the types of injury which the product may cause in the event of its misuse, or otherwise; and

(vi) possible alternative designs which could be adopted to minimise the risk of injury and misuse.

Needless to say, the core product documentation generated by the risk management process should be maintained centrally. It must be borne in mind that if any criminal proceedings are lodged against a manufacturer, the first port of call in assessing the strength, or otherwise, of a manufacturer’s defence will be the information contained within this core documentation.

In terms of quality assurance, in the US, adherence to ISO 9000 ought to ensure that manufacturing defects are minimised as far as possible, thereby reducing the risk of loss and the potential for criminal prosecution.

Finally, proper reporting is a crucial element in any successful risk management programme. Product manufacturers will need to ensure that they have developed, and continue to develop, an internal company policy to identify adverse events, such as product recalls or similar actions, and put in place a realistic programme of action as to how to deal with such events.

The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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