Lawsuit with Entrepreneurs in Business Law

Introduction

The legal environment in a business context is becoming more complex, because potential legal problems may arise from anywhere. The entrepreneur needs to understand the fundamentals of business law in order to satisfy customers besides making profits (Scarborough, N. M., Wilson, D. L., & Zimmerer, T. W., 2009). Apart from that, the government has regulated the business since colonial times in order to ensure the owner runs the business in a more responsible manner and the consumer’s rights and interests are protected. If the company falls into a lawsuit, it can cost the entrepreneur a considerable amount of effort and money; hence even a possibility of bankruptcy.

Product liability law started in UK and has great influence around the globe; however US products liability law is the most developed products regime. (Fairgrieve & Howells, 2007) because the structure of the US law, and the tort system allows for many claims not provided for in other countries, therefore, the impact of the US products liabillity law is the greatest now.

Whenever there is a case of product liability brought up to court, the plaintiff would try to prove that the product is negligent, reckless or careless in the design, has a manufacturing defect or lacked important information. However, the defendant, also the manufacturer would all means try to prove that reasonable action has already been taken to ensure the product is safe for use. (Randall Goodden) because according to s 402A of the American Law Institute Restatement (Second) of Torts (1965) “one who sells any product in a defective condition unreasonably dangerous to the user or consumer or to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his property …” therefore, companies should exercise due care while manufacturing their products.

The debate would be that “is the product reckless in design, has manufacturing defect or lacked important information?” Uncertainty surrounds the question of what is required to prove ‘defect’(Fairgrieve & Howells, 2007), both parties bring out their defence, but courts would usually rule in the favour of consumers, noting that companies should fulfil their duties, and be liable to any damages suffered by the customers, whether directly or indirectly responsible (elfinancierocr.com, 2008) because on simple reasons that many of the law is to protect the rights of the people, while this may seem unfair, in the case of Stella Liebeck, McDonald’s have to pay a huge sum of compensatory damages as well as punitive damages to Stella, as the courts ruled in her favour although the warning “Hot” has already been printed on the cup on the coffee.

Definition of product liability

Definitions of product liability have been changing over time (Landes & Posner, 1987; White, 1980); nonetheless, the scope is about the same.

Product liability applies to the legal liability of manufactures, distributors and sellers for damage caused by a defective product manufactured or supplied by them (Product liability Act 1989). Product liability should also promote product safety, but misdirected liability efforts may hinder beneficial innovations and product development (W. Kip Viscusi & Michael J. Moore). Therefore, in simple terms, product liability is the company taking responsibility of any damages the product might cause to the consumers. The essence of product liability is to prove the defect in the product, the customers should have the burden of proof, because if only there is a defect in the product, can the case be filed under product liability law. The consumer must use the product for their intended usage, and if the product causes damage in any way, a product user is contributorily negligent only when the user behaves unreasonably while being fully aware of the risks posed by a defect in the product due to its nature. A user or consumer has no obligation to check the product beforehand, but rather is entitled to assume that the products are fit for the ordinary purposes for which they were made. In most jurisdictions, the plaintiff’s contributory negligence is a partial rather than a complete defence, which often reduces the plaintiff’s recovery. (Richard W. Wright, 2007).

Product liability claims is negatively correlated with cash flow (Beatty, Gron, Jorgense, 2001) and product liability has increased insurance rates (Abelson, 1988; Abraham, 1987) and prices for drugs, consequently resulting in calls for product liability reform (Litan & Winston, 1988; Schwartz, 1988; Viscusi, 1991). Many product liability trial cases’s outcome is often very unpredictable, as in who would win (Huber, 1988) and the amount of damage awards (Greene, 1989) as so, the definition of product liability has changed over time.

2.1 The Importance of Product Liability

Every business must take into consideration of every possible variables and uncertainties that may exist or come to exist in the life of business. Product liability is important for a business to avoid the unnecessary uncertainties and risks. The manufacturer’s obligations to the consumer include the duty to inspect and test the product for safety and the duty to warn buyers and users about the product’s harmful characteristics. The duty to warn is especially important, because it involves anticipating what kinds of persons (in terms of age, skills, and intelligence) are likely to use the product, thus determining what constitutes an effective label for warning and instructing users, and balancing the impact of warning statements against promotional slogans and caricatures on the label.

The uncertainties and risks may have big impact to one company. The latest case that happen to Toyota cars which consequent to call-back all the problems cars for further investigate. This will give a very big impact to Toyota Company with huge cost involved and the good name of company definitely affected. Another famous law case about product liability is an old lady claim for compensation of injury from the McDonald’s, which the over hot coffee spilled on her leg. Hence product liability plays a very importance role.

Furthermore, company who concern on product liability could maintain the product quality. Every single defective product that harm on consumer, the company will have to bear the responsibility and pay for compensation. Hence to avoid the unnecessary risk, company may put extra effort on production to reduce the defective product.

Hence every business could not ignore the importance of product liability, even though it does not bring the monetary benefit to the company, there is a responsibility of every business to take into account of it.

2.2 The effects of product liability to the manufacturer

A manufacturer would have the potential liability if they produce or create a product that possesses dangerous (Monheit, Silverman, & Fodera). There are few effects of the product liability to the manufacturer.

First, the manufacturer could face bankruptcy if the product was imperfect and unobservable safety which in the end result the product might injury the consumers. According to Sumiko Takaoka (7 October 2003), if the manufacturer produce the product is defective, it could have the high chances that the consumer will get injury. Therefore, the consumer can claim the compensation from the manufacturer if the product has found that it was a negligence manufacture, negligence design or failing to warn the consumer.

Secondly, if the manufacturer wants to overcome the product liability problem, they have to invest a sum of money in the research and development (R&D) to their product so that it can reduce the risk of the product liability lawsuit. Therefore, the manufacturer needs to increase the cost of developing the R&D department and the cost of operating it. The function of R&D in a manufacturing are to ensuring the product meets the quality levels and the specification of the product. Most of the manufacturer purposely develops R&D because they believe that R&D could affect the safety of the product they produce (Andrew F. Daughety & Jennifer F. Reinganum, December 1995).

Thirdly, according to Marc Breuil (2005) in the reality life, an effective quality control system might not help manufacturers to avoid the product liability claims. The manufacturers work in the consumer goods or business to business sectors, can be affecting by the product liability litigation. If the manufacturers and distributors consumer goods harm to the general public, they can face the strict liability situation. Because of this, many of the Europe and US manufacturers purchase the product liability insurance from specialized market due to they have the potential catastrophic nature of the risk. The product liability insurance is another cost to be considered by the manufacturer.

Fourthly, Jürgen O. Skoppek (July 1, 1989) has done a survey that four out of ten CEO in USA believe that the product liability system was a troublesome impact on their companies because it affecting the planning and operating their business. Apart from that, due to liability risks, many firms have cancelled their introduction of new products, causing discontinuation of one or more product lines. When the company gets sued by the consumer due to their negligence design or manufacturer product, it might cause the company bankruptcy because of paying the high compensatory damage to the consumer. The product liability system has a big effect to the market where the company cannot simply produce a product and sell in the market. They have to develop the research and development department to ensure the product they produce should be perfectly safe. Otherwise, their company profits are going into the payment of settlements, and jury verdicts if there is complaint or sue by the consumer.

For an example case, in 1988, the Rawlings Sporting Goods Company which is a leading manufacturer for football equipment, they had announced that their company would no longer produce or sell the football helmet due to the high cost of research and development to make the football helmet more safety when the footballers using it. The reasons they stop the manufacturing football helmet was because there are at least 25 helmet liability verdicts in U.S. courts with total $46 million jury awards, and another 50 cases in progress since 1973.

2.3 The implementation process

According to Rasco(1997) there are three main ‘causes of action’ which is recognized by State courts in the United States ,where plaintiffs in a product liability lawsuit can receive compensation: which are negligence, strict liability and breach of warranty

Firstly, Negligence occurs when a defendant such as manufacturers or distributors fail to do something that is a ‘reasonable care’ when they are producing, marketing, or selling the products and consequential in a personal injury (Rosenbaum, 1998). Every case involves questions such as: Was the product defective is made unreasonable hazardous? , was the plaintiff conscious of the risk or danger of the product? Were the warnings given is accurate? and Did the product meet the industry and government requirement? Negligence can be claims for more charges such as negligent design, negligent manufacturing and failure to warn. In the case, how hot is “too hot”? Although the Styrofoam cup is well design for its customer but if not properly handled the coffee cup, it will cause injury as the coffee is too hot. The court concluded that warning of hot water can be printed on a cup even can be posted on window and displayed in flashing neon lights. ( Enghagen & Gilardi, June 2002 ).A manufacture or company has to design a product that is 100 percent safe and free of unreasonable risks. Besides, Manufacturers also need to warn customers about the danger of misuse and normal use as well as attach warning label and instruction on their products.(Scarborough, Wilson and Zimmerer, 2009). Other example, Cathey v. Johns-Manville Sales Corp (6th Cir. 1985), There was sufficient evidence to show the manufacturer had failed to promptly warn of hazards of it insulation products that containing asbestos. (Baldwin, Baldwin, Hare, Jr., &McGovern, 2009-2010).

Secondly, strict liability occurs when the injured person can prove that product he or she bought from company manufactured is defective and unreasonably dangerous. (Scarborough, Wilson and Zimmerer, 2009).Cases which involves foods is mostly unsuccessful because most foods cannot prevent from risks. (Rasco, 1997). In the case study, the coffee was nature has the danger attribute and was intended to be to consume as a hot beverage. ( Enghagen & Gilardi, June 2002 ).

For example, A user is injured by the head of an axe that flies off its handle. If the user can prove the defendant sold defective axe then it can be considered as unreasonably dangerous to the user, who is physical harm and the defective axe was causing the user injured. (Scarborough, Wilson and Zimmerer, 2009).

Thirdly, According to Rosenbaum (1998) a breach of warranty occurs when there is no foods conform to either an express or an implied warranty. Liability cases claim breach of implied warranty, In the case of a breach of ‘implied warranty of merchantability,’ According to Rubin and Lamb(1993) there are two main tests to be used to decide whether the food is fit for human consumption. The first main test is ‘foreign–natural test’ which is based on whether the substance that caused the injury is by foreign (e.g. glass in chicken soup) or natural to the food (e.g. bone in chicken soup).while, the second main test is ‘reasonable-expectation test’ which is based on what a consumer might ‘reasonably expect’ to find in the food.

In conclusion, every business needs to understand the three main causes in order to protect themselves and consumer from unnecessary harm.

2.4 Prevention of product liability

According to Aaron Larson (2003) product liability is law to protect the consumer from defective products. Besides, the product liability law can alert the seller to develop and implement effective control to prevent potential product liability claims and strengthen their product quality and reputation.

Today, all businesses have interest to develop and implement the effective loss control program to prevent potential product liability claims and meet the customer requirements. According to Kenneth Ross, whom is the most famous lawyer in the product liability aspect, he had addressed several recommendations to manufacturers and product sellers to minimize the risk of liability. The methods that Kenneth Ross had suggest including safety management, safety communications, design and manufacturer, post-sale, document management, seminars and training, consulting attorney and expert witness, and so forth(http://productliabilityprevention.com).

According to Kenneth Ross, the first way to prevent the risk is through management coordination and control. Management coordination means that coordinating existing resources to assure the resources are used most efficiently in pursuit the specified objectives, however, control is including the managerial functions which are planning, organizing, staffing and directing (www.businessdictionary.com). Therefore, this strategy involves all company departments because the commitment to product safety must start from the top management and effectively communicated throughout the organization. Therefore, all the company functions and resources can be working together in an effective coordinated program and that will encompasses all phases of the product life cycle, from initial plan to eventual sale and even beyond.

The second way to rescue from product liability is the product design development. The safety policy is the most important part of product safety strategy and should be driven by top management and designed to meet the provisions of ordinance so the safety design can meet the court decisions and customer expectations. According Keller and Heckman, the manufacturer and seller may undertake several actions to ensure the safety product such as updating product safety and liability management programs, reviewing formulas for compliance with regulatory requirements, and so on. For the reason that the defects in this level still can be corrected and most of the allegations in product liability lawsuit are related to the design activities so they should pay more concern in this area. The examples in this area are inappropriate material, noncompliance with standards, inadequate warnings, defective design, and so on. Fortunately, currently there are few technique to ensure the standard of product safety is match the requirement, for instance, the destructive and prototype testing, accelerated life cycle testing and safety audits are common used for identify the critical components, failure modes, and the end product performance.

The third prevention is safety communication, this including product warnings labels, instructions, safety videos, and advertisement. According to Kenneth Ross the law state that the manufacturer have responsible to warn when the product is dangerous; the danger is or should be known by the manufacturer; the danger is present when the product is used in the usual and expected manner; and the danger is not obvious or well known to the user (http://productliabilityprevention.com). Safety communications are required to prevent the problem that can be avoided. In United State, there have three different level of safety alert: danger, warning, and caution, and both of this word have different meaning and symbol to represent the level of risk (www.ehow.com). In addition, according to Gilby (2010) the product warning labels used to remind the consumer about the danger of those products and if not avoided it may result in serious consequences such as serious injury or even death. Therefore, the manufacturer and seller should understand that warnings help avoid the use of unsafe products and instructions give directions for safe use of a product.

The next program is post-sale management, according to Kenneth Ross this prevention including management systems, safety improvement, government report, and so forth. The field monitoring systems provide company the important information to receive and examine product safety information which the sources are come from customer complaints, surveys or claims. This information is extremely important to the company to do review and analysis of field feedback, and continues with coordinating corrective actions in design, quality control, or a product recall. In addition, to prevent the potential product liability the field monitoring program can be used to continuous self-evaluation and improvement so the risk can be minimize in the future.

The fifth way to avoid product liability claim is document management. According to Kenneth Ross a good document control system is including the company policies and procedures, education, and appropriate legal counsel. An effective document control system will easily to retrieve whenever needed, improving workflow so the business processes run more smoothly, and as a result it can increase competitiveness through improving business processes, reducing cost and preventing losses (www.ademero.com). This system will help to provide the important information to response to the situation and only the accurate information is possible to make the problem settle effectively. For example, when face the trial to court the documents can proof the company’s design, manufacture, and sale, both with safety requirements, because only accurate and detailed records will be useful. Besides, documentation can be useful when the field modification is necessary. Therefore, all significant records should be protected and retrieved for future need.

Next prevention tactic is legal and contractual. According to Kenneth Ross a company should have its own in-house legal department or have a legal counsel. The legal department or counsel is important in Products Loss Control program because it provides consultation and guidance for compliance with laws and regulations, and to ensure that all production process is in line with product liability law such as contracts, warranties, warning labels, and advertising. This approach will helps the manufacturer or seller better understand the purchase and sales terms and conditions, contracting procedures, dealer agreements, and this can help them avoid from lawsuits.

Manufacturing and quality control also will help the manufacturer and seller prevents the potential product liability. Manufacturing involves the process of turning the raw material into a finished product, in any phases of product manufacturing can result in defective products. Quality control efforts should extend from the initial process and those responsible for quality control should have the relevant knowledge. To better understand whether the product is safe, the company can implement ISO 9000. ISO 9000 is a family of standard for quality management system and it maintained by ISO-International Organization for Standardization, it have many functions such as a set of procedures that cover all key processes in the business, monitor processes to ensure they are effective, checking output for defects, and so on. Through ISO 9000 the manufacturer and seller can produce safer product and provide a documented assurance so the product is more consistent with the quality standard (www.iso.org).

Last but not least, the techniques and concerns that mentioned above are important to every business. Therefore, the manufacturer or seller should be better prepare and understand the potential product liability so the business can be run smoothly and wide accept by public.

3.0 Case summary

The case study, “How Hot Is “Too Hot”?” is about a 79 year old woman named Stella Liebeck who spilled hot coffee onto her leg while wanting to add cream and sugar to the coffee. Liebeck sued McDonald’s under product liability law. Liebeck received third degree burns over 6 percent of her body. Stella went through skin grafts, where skin was shaved from one part of her body to place it on top of the burned areas. Any liquid to come in contact with human skin at that temperature is bound to cause third degree burns. This tragedy made Stella undergo severe pain and her medical bills cost her more than 10000 dollars. After Stella was hospitalized for eight days, she wrote McDonald’s to tell them about the coffee spill and her burns because Stella Liebeck hoped that McDonald’s will pay for her medical fees but McDonald refused to pay.

One year after the accident, Stella Liebeck filed a lawsuit against McDonald’s, indicating the hot coffee was not only but in fact too hot. In legal terms it is “product liability” which in law is under section 102(2) of the Uniform Product Liability Act, that means whoever makes or sells a product, to the public are held responsible for ensure the particular product are safe and do not pose a hazard to the public. After a tentative, the lawsuit said the coffee was manufactured defectively because it is excessive heat, moreover, it did not warn customers of the risk of incurring severe burns from the coffee if it were spilled. Therefore, Stella claimed the high temperature of the coffee presented an unreasonable risk of injury. In addition, McDonald’s brews coffee at 195 to 205 degree and keeps it for sale to customers at between 180 to 190 degrees to maintain optimum taste, because they assumed the customers buy coffee on their way to their work or home and will enjoy the coffee when they arrive at their destinations. McDonald’s have been maintaining this standard since 1978 although there are more than 700 burn complaints over the years but McDonald’s continues to serve it at 180 degrees and above.

For Stella Liebeck case, McDonald’s argued that everyone knows coffee is hot and that could not be a surprise to Stella, and the warning “hot” is printed on the coffee cup. However, according to the medical science, the coffee or any hot beverage is unsafe to drink at 180 to 190 degree, because it will cause burns to the throat if swallowed within the first few seconds. But the McDonald’s argued the court have focused on the person who spilled the coffee, and never before found that the coffee itself was defective because of high temperature, that means the customer may need to be held responsible when an external force causes the beverage to spill out.

At the end, the jury awarded Stella Liebeck $200000 in compensatory damages for her injuries but reduced to $160000 because the jury ruled that Stella also need to be responsible for the accident. Besides that, the jury also awarded her $2.7 million in punitive damages but the amount also reduced to $480000 for same reasons. Eventually, McDonald’s and Stella Liebeck entered into a secret post-verdict settlement.

4.0 Question1

On what grounds could Mrs. Liebeck have brought her product liability suit against McDonald`s?

Mrs. Liebeck can bring her suit against McDonald`s based on 3 important matters, which are negligent design, negligent manufacturing, and failure to warn.

Firstly, negligent design means that the manufacturer has the improperly design their product and this may cause the consumers who use the product to get injured. In this case, the McDonald`s coffee cup is just a simple cup that can fill in the hot coffee but is not aware about the safety while consumers are using it. When Mrs. Liebeck wants to add the sugar and cream in the coffee, she has to open lid to put the sugar and cream. She is not aware that the coffee is very hot and the coffee spilled into her lap, soaked into her sweatpants, and burned her severely. The improperly designed McDonald`s cup cause Mrs. Liebeck to get injured. In 2005, there is another similar case where the plaintiff sued Glug Cola failed to design their product in a safe to use manner because the plaintiff shaked the bottle and the bottle exploded, causing the plaintiff injury on the hand and face and spent several days in the hospital. The plaintiff prove that the bottles were too small to contain a carbonated beverage and the Glug Cola noticed the problem but do nothing to correct their product. But, the courts think that the negligent design is hard to prove because many companies have spent months or years to design their product. Therefore, the companies have to design the product and even the packaging 100 percent safe to avoid the liability charges.

Secondly, the negligent manufacturing is that a customer can claim from a company when the company fails to have the properly manufactured products and cause the customer injury when using their product. Mrs. Liebeck believe that the coffee she bought and the coffee cup from the McDonald`s has been negligently manufactured because when she removed the lid, the coffee spilled into her lap. Although this is not sufficient evidence to show that the problem came from the coffee cup, but the judge of the courts believe that this is one of the product liability of the company. In the case of Glug Cola, the plaintiff’s attorney claimed that Glug Cola used too much carbonated water in one single product. This may cause a big explosion when the product is being shaken too hard. The Glug Cola might fail to follow the proper manufacturing or inspection procedures to produce their product.

Thirdly, the failure to warn is one of the negligience claims a customer can bring to court against the company, it means the company has failed to warn customers about the dangers of using their product and the correct instruction of using the product properly. The McDonald`s coffee cup does not aware the consumers that the coffee is very hot and be careful when adding the sugar and cream or drinking it slowly. Mrs. Liebeck have not notice that the coffee could be so hot and does not get any instruction or warning label at the coffee cup. A common solution is to place a warning label at the product or attach literature which detail the known hazards. For example, the McDonald`s can put a notice “Caution: Hot Beverage” on the coffee cup. Some of the peoples believe that these warnings may seem useless, but it is useful to help the companies to defend themselves against the product liability claims. For the Glug Cola case, the company do not notice the consumer do not shake the product before using it. It is the companies’ responsibility to warn consumers about the product dangers if ever the product is misused.

4.1 Question 2

Do you agree or disagree with the jury’s verdict in this case? Explain.

The jury’s verdict in this case has been agreed upon. The jury had made a right decision on this case because both parties have to take responsibility for their action.

At first, jury rewarded Mrs Liebeck $2.7 million in punitive damages because the jury found the defendant was wilful and careless (Enghagen & Gilardi,June 2002 ),therefore, the compensation amount was reduced to $480000.

McDonald’s knew their coffee is too hot to be drink and the consequences if coffee was to be spilled. They didn’t solve it so McDonald’s was found to be 80-percent to be blame for the accident. On the other hand, the jury also found out that Stella Liebeck was somewhat responsible as she was careless while handling the hot coffee, and therefore 20-percent responsible for her own injuries. Thus, the portion of the verdict considered to compensate Stella Liebeck for $200,000 was reduced to $160,000 for the punitive-damages. (Enghagen & Gilardi,June 2002 ).

As a restaurant owner is responsible for placing detailed warning label on their product packaging as well as to inform about danger of temperature to customer so that they will be aware of the danger. (Scarborough, Wilson and Zimmerer, 2009).McDonald’s did not tell or remind the customer that their coffee is at temperature between 180 and 190 degree that will lead to serious injury. The jury viewed this case as an unfeeling disregard for the safety of the customer. This case has been using as reference for other similar case. For example, similar case like like Immormino v. j&M Powers, Inc., d..b.a.McDonald . Immormino removed the lid from her cup to sip her tea but the tea spilled on her lap. As the result,the court claim that McDonald’s negligently failed to warn her of the dangers of hot tea. (Enghagen & Gilardi,June 2002 ).

The Specialty Coffee Association of America (SCAA) had established standards for making and serving coffee with proper temperature for coffee which is about 197.6 to 204.8 degrees Fahrenheit but in this case, the coffee temperature that McDonald’s sells is about 180 and 190 degree Fahrenheit (82–88 °C) but if customer drinks the hot coffee immediately, it will cause a serious third-degree burn in two to seven seconds. It also depends on the duration in making coffee which is about between four to eight minutes. At the completion of the brewing, the Specialty Coffee Association of America (SCAA) suggested that the proper holding temperature should be 176 degrees Fahrenheit. (Enghagen & Gilardi June, 2002)

Burns can be classified to three degree burns. First-degree burns can affect only the outer layer of the skin which is epidermis, second-degree burns that will affect to the second layer of the skin that called dermis, third-degree burns that involve both layers of the skin and also damage the underlying bones and muscles which can cause serious damages. First-degree burns may heal on their own in 10 – 20 days if there is no infection develops. Third-degree burns may require performing skin graft. After any dead tissue is removed, the doctors may require performing skin grafting, by surgically sewn over the burn. The skin can be gotten from another part of the person’s body, from a donor, or from an animal generally from a pig. (Ehrlich, December 23, 2008).