Product liability template_elec prod.qxd - BLM Law

Editorial

Since the inaugural edition of Brand news, product liability issues have

continued to create headlines. Notably, the Salmonella contamination in

Cadbury’s chocolate led to a product recall of more than 1 million bars with

associated costs of £15m, £20m for safety modifications to the plant and a £1m

fine - plus the consequence of reputational damage to Cadbury’s previously

excellent brand.

Another recall involved over 20 million Mattel toys containing high levels of

lead paint. This recall, which followed similar incidents involving other

products manufactured in China, highlights that damage to reputation may

not be limited to a particular company or producer but affect a country -

creating the impression of lax safety standards.

The above demonstrate that the nature of product liability law often involves

multi-jurisdictional issues eg a product could be manufactured in one country,

modified in another, sold in a third and go on to cause damage in a fourth

jurisdiction. Protecting clients’ interests requires an established global network

of expert product liability lawyers liaising to deliver an efficient, reliable and

coordinated approach. BLM is active in such a network and one of the

member law firms has contributed an interesting article on page 14.

Damage or loss affecting consumers often involves a class or group action.

The potential for a class action underscores the importance of mounting a

concerted response by defence lawyers. This is best illustrated in the US,

where the Defence Research Institute (The Voice of the Defence Bar - DRI) is

very active advising defence trial lawyers and corporate counsel on areas such

as class actions brought before the courts.

This edition covers problems with importing foodstuffs, what constitutes ‘a

defect’ under the Consumer Protection Act in the UK and the complex issue of

causation in relation to medical product liability claims involving a drug or

device as a defective product (illustrated by the MMR vaccine scare).

We trust that you will find edition 2 informative and pragmatic. If you wish to

discuss any product liability issue covered in this edition (or otherwise), please

do not hesitate to contact us.

Mark BensonPartner, BLM Manchester

BBrraanndd newss is published by the marketing

department of Berrymans Lace Mawer (Castle

Chambers, 43 Castle Street, Liverpool L2 9SU) on

behalf of the partnership. Printed in England by

Paterson Print. © Berrymans Lace Mawer 2008.

Berrymans Lace Mawer is regulated by the

Solicitors Regulation Authority and accredited to

quality standards ISO 9001 and Lexcel

BBrraanndd newss May 2008 - edition 2

Contents

2007: a turning point for product safety? – p2

The bitter aftertaste of chocolatecontamination – p4

The trials and tribulations of importingfoodstuffs – p6

A problematic diagnosis - causation inmedical product liability claims – p9

Total recall: the real cost of productrecalls – p10

Recent cases on defective products withinthe Consumer Protection Act 1987 – p12

Product liability - a Chinese perspective– p14

Consumer redress and ‘class actions’ – p17

DRI - the Voice of the Defence Bar – p18

BBrraanndd newss —— May 2008

page 2 Berrymans Lace Mawer

2007: a turning point for productsafety?

The latest EU statistics confirm that product recalls arenot only a worldwide problem but are increasing yearon year. According to the latest annual report by RAPEX(the Rapid Alert System for non-food consumerproducts), published on 17 April 2008, there were 53%more notifications in 2007 than in 2006. However,European Commissioner for Consumers, MeglenaKuneva, insists that ‘2007 will mark the turning pointfor global product safety’ and highlights growinginternational co-operation with China as the key toensuring the safety of low quality, low cost massproduced products from the Far East.

So what will be the impact for insurers? Does this figure reflect an increase in risks to consumers fromdangerous products? Or is the increase a reflection ofthe significant growth in regulatory and enforcementactivity in recent years? While Ms Kuneva may conductheavily publicised trips to China to highlight concernsas to the safety of Chinese manufactured productsexported to EU markets, how can insurers hope toprotect their position when the prospects of recourse inthe Far East remain poor? Will 2007 see the turningpoint not only for consumers but also for insurers whoend up bearing the cost?

The statistics show the significant proportion of recallsrelating to products manufactured in the Far East. In2007, 700 RAPEX notifications concerned products of

Chinese origin, including Hong Kong. This figurecorresponds to 52% of all notifications and confirmsthe growth of dangerous products made in China andmarketed in Europe as compared to data from 2006. InOctober 2007, there was an all time high of 179 RAPEXnotifications and during the same month 69% of allArticle 12 notifications (ie measures or actions taken forproducts representing a serious risk) concernedChinese products.

Inevitably the publicity in August 2007 concerningMattel’s decision to announce a major worldwide recallof some of its Fisher Price toys led to press attentionfocussing on Chinese manufacturers. Other presscomplaints followed involving recall announcementsby Nokia and Asda. Similarly, there has been pressattention focussed on leather sofas manufactured inChina which, it was alleged, caused contact dermatitis.However, before concluding that the safety of Chinesemanufactured goods is declining, it is worthconsidering the level of trade with the Far East and thedeveloping regulatory regime.

For example, it is important to bear in mind that almost80% of all toys on the European market are importedfrom China. It is also notable that toys alone accountedfor almost one third of notifications in 2007 with thenext highest class of notification being motor vehicles(15%) followed by electrical appliances (12%). It is quiteclear that child safety is (rightly) the top ranking priorityfor market surveillance authorities and while thisproportion of output may not be reflected across other


Berrymans Lace Mawer page 3

industries, there is no doubt that China is the source ofsignificant proportions of components and products. Itis no real surprise that this proportion is reflected in thenumber of notifications.

There is no evidence to suggest that there is an increasein risk to consumers from dangerous products. In fact,there has been a significant increase in regulation andenforcement within the EU – there is little doubt that EUproduct safety regulations are, in many sectors, by farthe strictest in the world.

The EU Directive on general product safety(2001/95/EC) has produced significant tightening of the regulatory regime and the sanctions which canbe imposed, implemented in the UK by the GeneralProduct Safety Regulations 2005. The Directiveprovides the legal framework for RAPEX which is usedto exchange information on dangerous non-foodconsumer products, particularly those governed by‘sectoral’ directives, for example, toys, cosmetics,electrical appliances, motor vehicles and machinery.This is because most of the specific ‘sectoral’ provisionsdo not provide for a similar rapid informationexchange system which has changed the landscape interms of information on dangerous products withinthe EC, not least in identifying themes relating to theorigins of the products.

Interestingly, the RAPEX statistics also illustrate growingawareness of the Regulations by producers and retailerswithin the EU. Compared to 2006, there was anincrease in the proportion of notifications concerningvoluntary measures taken by the retailer/producer from41% in 2006 to 50% in 2007. The levels of compulsoryand voluntary measures respectively are now almostequal, confirming that the Directive is increasinglysuccessful in forcing retailers/producers to act swiftlywithout pressure from regulators.

The EC claims that the exchange of RAPEX informationwith China has revealed ‘tremendous capacity andpotential for improving product safety upstream in thesupply chain’. The Commission is assisting the Chineseauthorities in setting up their own domestic alertsystem, similar to the European RAPEX, whilst increased

co-operation has, apparently, already ‘yielded tangibleresults in terms of control and measures taken againstunsafe products of Chinese origin found in Europe’.

On a formal diplomatic level, the EC claims increasedconstructive co-operation with the Chinese productsafety administration under the Memorandum ofUnderstanding between the Health and ConsumerProtection Directorate - General and the ChineseGeneral Administration for Quality Supervision,Inspection and Quarantine (AQSIQ) signed in 2006.The information obtained via RAPEX is systematicallyfed to AQSIQ and communication at expert level is alsonoted in the annual report, pursuing the commendableobjective stated in the memorandum that ‘a high levelof product safety is key to consumer confidence andreciprocal trade’ (point 28 of the Joint Statement issuedduring the tenth China-EU summit held in Beijing on 28November 2007).

So where does all this laudable activity leave insurers?Can point 28 of the joint statement be quoted whenseeking to persuade Chinese manufacturers to acceptresponsibility for defective goods which have resulted inloss? The reality is that while the stricter regulatorycontrols and information gathering will provide a basis for pressing any mass producer of low qualityunbranded goods to improve standards, in the shortterm a sensible strategy to mitigate risk is still required.

Supplier audits and controls are the key – the processes in place to ensure quality standards betweenmanufacturer and distributor will provide somesecurity. Local representation and knowledge is also arequisite. As BLM’s associate lawyers based in Chinareport elsewhere in this edition, an understanding ofthe local procedure (and the cultural issues) is critical toany prospect of successfully pursuing claims in the FarEast. Financial pressures will in time force up qualityassurance and quality control so that companiessourcing products from China can be insurable.

Inevitably, it is likely that product recalls will continueto rise in the immediate future. The Directive hasundoubtedly changed product recall risks in Europeand while figures from Trading Standards regulators in

terms of compulsory measures and prosecutions arestill difficult to obtain, there is no doubt that the threatof action from regulators in accordance with theDirective has caused retailers/producers to review theirobligations. Whether 2007 will indeed be a turningpoint is far from clear. What is clear is that despite thetalk of increased co-operation at a high level, insurerswill need to continue paying close regard to theassessment of risk and the need for localrepresentation.

Jim SherwoodPartner, BLM London

The bitter aftertaste of chocolate contamination

In January 2006, Shaun Garratty, a staff nurse fromRotherham first started to suffer from the symptoms of food poisoning. Prior to his illness he was a regular sportsman either hiking, mountain biking orswimming twice a week. As sustenance, he took withhim two bars of chocolate, both manufactured byCadbury’s.

At the time Mr Garratty first became ill with suspectedfood poisoning, he was taking antibiotics for a chestinfection and his GP thought initially that there was aconnection between that medication and his symptoms.

By March 2006 Shaun Garratty had lost three stone, hewas rushed to hospital after collapsing at home. He wassubsequently diagnosed as suffering from a rare formof Salmonella which in the UK could only be linked tocontaminated chocolate crumbs used by Cadbury’s. MrGarratty spent seven weeks in hospital and some tenmonths after his initial symptoms was still sufferingfrom the effects of Salmonella Montevideo so pursued aclaim against Cadbury’s.

Cadbury’s Schweppes Plc has been making chocolatefor 183 years, the company having been founded in

1824. Prior to this incident the company had a solidinternational reputation as a manufacturer ofconfectionary.

Salmonella was first discovered by Cadbury’s staff on 19January 2006 at its Marlbrook factory in Herefordshire.A leaking pipe at the factory led to chocolate mixbecoming contaminated. Factory managers decided to carry on with production on the basis that contamination levels were minimal, and so they thought that there was no threat to consumers.

The Food Safety Act 1990 provides that in the event of any contamination, companies must withdraw food from the market place and inform all relevant authorities. It was not until some five months after theproblem was initially discovered by Cadbury’s staff thatthe Food Standards Agency (FSA) was notified. In themeantime, officials working for the Health ProtectionAgency noticed a sudden rise in a number of personscontracting Salmonella Montevideo. In 2005 there wereonly 14 reported cases in contrast to the periodbetween January – June 2006 when over 53 cases were reported.

In June 2006 Cadbury’s undertook a large scale product recall. In excess of one million bars of chocolate were removed from retailers, the companymaking arrangements to bury some 250 tonnes ofchocolate. There then followed a lengthy investigationby officers from the FSA and environmental health officers from the relevant local authorities. The investigation culminated in summonses being issuedwith the case being heard at Birmingham Crown Courton 16 July 2007. The company entered pleas of guilty tonine offences relating to the sale of food which wasunfit for human consumption and failing to notify theFSA of the contamination problems it was experiencingat its Herefordshire factory. Fines totalling £1m wereimposed together with costs of £152,000. The judgewas told that the company had spent £15m in recallingcontaminated chocolate and a further £20m in carryingout safety modification.

The judge did not accept the prosecution’ssubmissions that the Salmonella outbreak had arisen



because the company had introduced a new system oftesting its products in an endeavour to save money. Insentencing the company the judge, recorder GuthrieQC, described the offences as having arisen due to ‘aserious case of negligence’ and said, ‘It therefore needsto be marked as such to emphasise the responsibilityand care which the law requires of a company inCadbury’s position’. He added that the new testingsystem which had been introduced by the companywas ‘Badly flawed and wrong’.

In imposing sentence the judge will have taken intoaccount both aggravating and mitigating features.Examples of aggravating features in connection withthis case are that the company did not notify the relevant authorities until June 2006 despite being

aware that there was a problem in January of thatyear; the company had introduced a new, flawedtesting system; the serious level of the contamination,in total some 42 people including Mr Garratty becameill as a result of eating the contaminated chocolate.Mitigating factors taken into account by the courtincluded the company’s early plea of guilty, togetherwith the company’s good reputation and the fact thatthe offences had not arisen as the result of a desire tosave money.

The fine imposed at Birmingham CC was one of thelargest fines for breaches of food safety legislation. Themagnitude of the fine can be largely attributed to thecompany’s high profile and profitability and their failure to take immediate steps to notify the authoritiesand to recall the relevant products.

The fact that Cadbury’s failed to take all of these stepsuntil months after being made aware of the initial problem undoubtedly had a bearing on the court’sfinal decision when imposing a sentence.

The serious nature of breaches of food safety legislationwas also illustrated by the prosecution in September2007 of William Tudor of John Tudor & Sons. Mr Tudor,a butcher, was jailed at Cardiff Crown Court for 12months after having pleaded guilty to seven offencesrelating to the supply of meat contaminated with E.colito schools. As a result of an outbreak of E.coli amongstschool children, one child died. In commenting uponthe case, the FSA stated ‘Putting public health first mustbe paramount for all food businesses’. A public enquiryis currently being held into the causes of the SouthWales E.coli outbreak.

Visit the FSA website at www.food.gov.uk for a list of allrecent and archived product recalls. Already during2008 there have been a number of product recallsincluding Walker’s Crisps (rubber contamination),Sainsbury’s Hollandaise sauce (glass contamination)and Imperial Snack Foods Limited – premier qualityseed mix (Salmonella). Despite the Cadbury’s case,manufacturers appear to be more aware of the importance of timely product recalls in order to avoiddelay, as in Cadbury’s.



The increasing number of product recalls in the foodsector is demonstrated by the fact that the figuresincreased by a fifth in 2007. This can be attributed to aneed felt by companies to protect their commercial reputation, together with the threat of legal sanction.Withdrawal of food products remain at a high level, thisbeing in line with EU figures showing that productrecalls average 18 per week, as opposed to four permonth some 18 months previously. This increase inproduct recalls illustrates the need for good qualitycontrol and due diligence systems bearing in mind thedifficulties raised in monitoring and maintaining qualitycontrols in respect of goods sourced from outside theEU. Data over the last 12 months indicates that approximately half of the recalled products originatedfrom China. Given the ever increasing inclination ofconsumers to engage in litigation coupled with courtpowers to impose significant financial penalties, theimportance of maintaining high levels of vigilance inthis area cannot be underestimated.

Francoise SnapePartner, BLM Birmingham

The trials and tribulations of importingfoodstuffs

Take a moment to consider the following statementsand then decide whether they are true or false:

A food supplier is not accountable if it ensuresthat non-permitted food additives are notdeliberately added to their products.

A supplier is not liable if non permitted foodadditives, which had been added to its foodsupplies by mistake, do not create a risk to thehealth of members of the public.

So long as the level of contamination is minuteand does not make the food unacceptable forhuman consumption, the supplier is in the clear.

If you answered ‘true’ to any of the above you wouldbe wrong. Or certainly according to the case ofHazlewood Grocery Limited v Lion Foods Limited (2007)QBD (Leeds).

If you are a supplier of foodstuffs, a manufacturer, or are involved in the food industry in general, thisdecision is highly relevant to you as it imposed a severe liability on food suppliers for the products thatthey supply.

Furthermore, this case is useful as it considered such important issues as breach of contract, food safety/contamination, genotoxic carcinogens, satisfactory quality, The Colour in Food Regulations1995, EC Regulation 178/2002, sections 13 and 14 of theSale of Goods Act 1979 (as amended) and the duties ofthe Food Standards Agency (FSA). The implications ofthis important decision are discussed below.

Facts

Briefly, the claim is that Hazlewood Grocery Limited(Hazlewood), the claimant, sought damages from LionFoods Limited (Lion), the defendant, in respect ofHazlewood’s discovery in 2005 that about 1000kg ofchilli powder supplied to it by Lion was contaminatedwith industrial dye called ‘Para Red’ – as many of youwill immediately be aware, this case has striking similarities to the ‘Sudan 1’ chilli powder productrecalls in 2003 and 2005. Para Red, like Sudan 1, is asuspected genotoxic carcinogen and is, therefore, noton the ‘positive’ list according to the EuropeanParliament and Council Directive 94/36/EC on coloursfor use in foodstuffs (as subsequently amended), andThe Colour in Food Regulations 1995 (as subsequentlyamended); as such it is not permitted in foods.

Consequently, the FSA quarantined the chilli powderand the food that Hazlewood had incorporated it into,and demanded a recall. The FSA also posted a list of 23affected products from Hazlewood on its website.However, shortly after this, the European Communitycommittee met with the FSA and the FSA changed itsstance to say that it only required the recall of foodthat contained a level of dye in excess of a specified



amount (ie in excess of 500 ppb). This level wasconsiderably higher than the amount found in Lion’schilli powder (120-240 ppb) but by then it was too lateas Hazlewood claimed that it had already sufferedsubstantial losses, given the recall, the negativepublicity generated, and the overall exposure to thepublic of this issue.

Outcome

John Behrens QC presided over this case and held thatthe implied terms of the contract were that the chillipowder at the time of sale should be:

reasonably fit for its purpose, namely use in the manufacture of food products in all respectssuitable to be sold on to the general public inaccordance with their description of satisfactoryquality.

Responding to Hazlewood’s allegation that Lion was inbreach of The Colour in Food Regulations 1995, thecourt found that the wording of Regulation 7(4) wasclear (ie ‘no person shall sell any food having in it or on

it any added colour other than a permitted colour …’),and as Para Red was not a permitted colour it matterednot whether it was added adventitiously ordeliberately. Nor did it matter that the amount was sosmall that it was undetectable by HPLC methodology.Therefore, the presence of the illegal dye in the foodconstituted a breach of the regulations.

However, there was some comfort for Lion. Eventhough the court was not required to considerwhether in fact the dye had been added deliberately ornot, it found that there was insufficient evidence todetermine how the batch became contaminated, andalso found that Hazlewood had not proved that ParaRed was added deliberately to the chilli powder.

Furthermore, the court found that Lion had notbreached Article 14 of the EC Regulation 178/2002. Thiswas because all the experts in the case had agreed thatthe chilli powder was not injurious to health within themeaning of this regulation, and in John Behrans QC’sview, therefore, the level of contamination did notmake the food unacceptable for human consumption.



Ultimately, this did not assist Lion as the court heldthat the existence of Para Red in the chilli meant that it contained ‘foreign or extraneous matter’ contrary tothe Raw Material Specification, as it was not there naturally and was not supposed to be there. Perhapsunderstandably, the court did not accept Lion’s argument that the term ‘foreign or extraneous matter’more correctly referred to glass, metal, packaging fragments etc or objects visible to the naked eye, andnot to Para Red. Perhaps the court’s view is clearly thecorrect interpretation of this common term.Having interpreted the meaning of ‘foreign and extraneous matter’, the court went on to considerwhether the chilli was ‘free from’ foreign or extraneousmatter. The court again found in Hazlewood’s favourand stated that the chilli was not absolutely free fromforeign or extraneous matter, despite Lion’s assertionsthat scientifically no matter can be absolutely ‘freefrom’ something.

The court also held that there were breaches ofsections 14(2) and (3) of the Sale of Goods Act by Lion.This was because:

the sale of the chilli contaminated with measurable

quantities of Para Red was not reasonably fit for itspurpose when sold because products manufacturedfrom it were liable to be posted on the FSA websiteand to be subject to recall as a result of advice orinstruction from the FSA.

Crucially, at the date of sale the FSA’s attitude was oneof zero tolerance and it did not matter that the FSA subsequently relaxed its guidance; this zero toleranceattitude was in line with other European countries atthat time and was not unreasonable. It also followed,therefore, that a reasonable person would not regardthe chilli to be satisfactory for the same reasons stated.

At the trial, Lion was critical of the FSA’s initial stance,and subsequent change of stance, and argued that thelevel of Para Red was extremely low, that it would befurther substantially diluted in any manufactured product, and that contamination at this low level couldonly be adventitious. Furthermore, there was a body ofopinion in the food industry which found the FSAapproach to these very low levels to be unreasonable.However, John Behrens QC refused to agree with thisand found the FSA’s stance to be reasonable in the circumstances.



What does this mean for suppliers?

Despite there being some sympathy for Lion given thatthe levels of Para Red were minute and that the chilliwas not harmful to the public, the court still foundLion liable. This is a stern warning to all suppliers toensure that they carry out appropriate checks on all products/imports, because a manufacturer bringing aclaim against a supplier will succeed even if it does notprove that the contaminant was added deliberately orthat it was injurious to health.

Indeed, it will also not be a defence to a supplier toassert that the food is fit for human consumption, andthis may just set some alarm bells ringing in the foodindustry.

This case also highlights the need to be acutely aware of exactly what the FSA levels or guidelines for a particular contaminant are, or what its approach is to a certain illegal dye, at the date of sale as it is irrelevant if the FSA’s later approach appears heavy-handed or if it changes its stance during a crisis.

Simon LambethAssociate, BLM London

A problematic diagnosis - causation inmedical product liability claims

Causation is a crucial but relatively simple issue in mostproduct liability claims. It is easy to see the causal linkbetween faulty brakes on a car and a claimant’swhiplash injuries arising from a road traffic accident. Inproduct liability claims involving medical equipment orprocedures, however, the issues can become cloudedwith a fog of medical jargon, statistics and lack of adefinitive scientific explanation.

Causation - the basics

All product liability claims require the claimant to provecausation, whether the action is in negligence, breach

of contract or under the Consumer Protection Act 1987.This was confirmed by Foster v Biosil [2001] 59 BMLR178, a claim concerning allegedly defective siliconebreast implants. The claimant attempted to argue thatto succeed she merely had to show that the implantshad failed in a manner which was unsafe and contraryto what she was entitled to expect. This was rejectedby the court which confirmed that a claimant mustprove both a defect and causation. The ConsumerProtection Act did not amend the burden of proof inrespect of causation.

The issue of causation is usually characterised as the‘but for’ test ie that the damage would not haveoccurred but for the defendant’s actions. In certaincases though (specifically occupational disease claims),where current scientific knowledge is unable to definitively prove that the defendant’s actions causedthe injury, the courts have been willing to find it sufficient for the claimant to show that the defendant’sactions made a material contribution to the damage.This approach has yet to be applied in a product liability scenario.

The complicating factors

Many of the difficulties arising with medical product liability cases are due to the limitations of current scientific knowledge. A fact highlighted by the recentcollapse of the group litigation regarding MMR vaccinations and the alleged connection with the development of autism. If the scientific community isunable to agree on the cause of a medical conditionor illness it is inevitably an up-hill struggle for aclaimant attempting to link their condition with atreatment or drug.

There are often numerous environmental and constitutional factors which could influence or impacton the development of a disease or illness, and thedefendants alleged defective product will be only one.Not only that but the claimant will have to show thatthe illness is not an underlying consequence of theoriginal problem which resulted in the received medicaltreatment. The likelihood of the defect contributing tothe alleged symptoms is also likely to be subject to



varying expert opinion with no definitive scientificopinion.

XYZ and others v Schering Health Care Ltd [2002] EWHC1420 involved the use of 10 expert epidemiologists toattempt to demonstrate whether or not there was a statistical association between the use of certain oralcontraceptives and the development of conditions suchas deep vein thrombosis or pulmonary embolisms. Theopinion of the experts and the manner in which theyapproached the claim varied but all relied on complicated statistical analysis, which even the judgestruggled to understand on occasion. Ultimately thecourt concluded after consideration of the numerouscase studies that there was not as a matter of probability any increased relative risk carried by the oralcontraceptives concerned in the litigation when compared to other products on the market.

Similarly in the matter of Piper v JRI (Manufacturing) Ltd[2006] EWCA Civ 1344 the claimant failed to establishliability in a case involving a hip replacement whichbroke some 18 months after it had been fitted. Despitethe presence of defects found on the hip prosthesis theexpert metallurgist was unable to indentify the fracturecrack which had caused the prosthesis to break, and itwas inconclusive as to whether such a crack was created in the manufacturing process or during implantation. As a result the claim failed both at firstinstance and on appeal. This decision was in part basedon the defendant’s good quality control systems whichhad resulted in just nine complaints over 80,000 prostheses.

Conclusion

The number of successful product liability claims arisingfrom medical treatment has remained small with theonly notable success arising from the litigation overHepatitis C contaminated blood products (A v NationalBlood Authority [2001] 3 All ER 289). No doubt furthercases of this nature will arise over the next few yearsand it will be interesting to see how the courts developthis issue. For those involved, however, it will be anexpensive learning experience as the costs in thesecases reflect the complicated medical issues involved.

It is reported that over £10m was incurred on the discontinued MMR vaccine litigation alone.

Claire OpacicSolicitor, BLM Manchester

Total recall: the real cost of productrecalls

The steady growth in the number of product recallsover recent years will have prompted many businessesto review their plans for handling such an incident.Recent high profile examples involving Cadbury’s



(Salmonella found in chocolate bars) and Mattel (theuse of paint containing lead in children’s toys), illustratehow costly and damaging a recall campaign can be.To what extent could those costs be insured against, orrecovered from third parties such as the componentsupplier? Are systems in place to track costs in order tosupport their recovery from suppliers and insurers?

Estimating the real impact

The impact of a product recall is both short and longterm. Attention is initially focussed on recovery, disposaland replacement of affected goods. Action taken duringthis critical period may continue to affect the success ofthe brand over the long term.

In addition to the obvious expense of the product’swithdrawal from sale other costs mount up:

Management timeManaging the recall and quantifying costs for recoverycan take up substantial internal resources.

Repair and replacement of affected itemsAn ordinary product liability policy does not cover thecost of rectifying defective stock, only the damageresulting from such defects.

Customer claimsCustomers who have had to remove stock from shelvesor gather information about the destination of affectedproducts may make claims for the affect of the recall ontheir own business. Potentially of greater concern arecustomers who have ‘own branded’ the goods, whomay intimate a claim for the cost of averting or repairingdamage to their brand image (for example by way ofadditional advertising, promotion and public relations).

Falling demandThe short term negative sentiment generated by therecall – which may be felt across other product lines –ultimately affects the bottom line. The effect of a brandor business being associated with a serious recall maylast for years, though measuring the impact may bedifficult.

External professional fees Some industries will typically involve external scientificor technical analysts to progress enquiries into the rootcause of the fault. Legal advice may be sought on theregulatory framework and how best to limit potentialliabilities and to ensure costs are recovered. The scaleof the recall may justify professional crisis managementand media liaison advice.

Insuring product recall costs

Standard product liability policies exclude the costsarising from a product recall though limited coverage isoften available as a policy extension. The alternative isto investigate one of the increasing number of specialistrecall policies on offer which are more likely to offer abroader scope of cover at an increased premium. Someinsurers may offer assistance with risk management andcontingency planning to mitigate the impact of a recall.The insurance options should be carefully reviewedwhen recall contingency plans are prepared and thepotential cost analysed.

The reality is that it is impossible to find insurance tocover all costs arising from every potential scenario. Ananalysis of the industry-specific risks should highlightthose costs which can be internalised in the short term(and perhaps ultimately passed on to suppliers) and thesubstantial costs which are most likely to threaten thelong term interests of the brand or business. Aninformed comparison can then be made of the cover on offer which will vary as to:

What types of event trigger the recall Some policies (frequently those designed for the foodindustry) specifically cover recalls arising fromcontamination but not other problems which mayprompt a recall.

Insured and excluded costs Since the financial impact of a recall is widespread,insurers are careful to define the types of expenserecoverable under the policy.

The financial limit of cover and size of deductible –which will have a significant bearing on the premium.



Reclaiming costs from suppliers and others

Most reputable suppliers will co-operate whenproblems are traced back up a supply chain, not leastbecause a recall of their component or ingredient maybe triggered. Few though will simply concede legalliability when the costs which flow can be sosubstantial, and many hurdles potentially lie in the way of making a successful recovery.

Good management of the conditions on which goodsare acquired (for example ensuring that purchase orderterms are effectively incorporated) may prove decisive.Internal accounting for the costs generated by the recallwill ensure that the true loss is pursued and will avoiddifficulties later when trying to evidence the claim.

Of growing importance due to the movement ofmanufacturing to the far east are jurisdictional issues.China for example does not recognise judgments ofEnglish courts, so that claims against a Chinese suppliermay have to be pursued in China itself giving rise toadditional practical and legal hurdles. For businesseswho import direct from the Far East, this may in itselfbe a convincing reason for obtaining first party productrecall insurance.

Anthony ManghamPartner, BLM Manchester

Recent cases on defective products within The Consumer Protection Act 1987

Prior to the introduction of The Consumer ProtectionAct 1987 (CPA) it was necessary for those injured by aproduct to prove negligence on the part of the manufacturer if they were to bring a successful claim.

However, under the CPA, the requirement to establishnegligence was removed and liability would attach‘where any damage is caused wholly or partly by adefect in a product’.

This article examines two recent cases in which theissue of what constituted a ‘defect’; was central.

In Section 3 (1) of the Act states:

There is a defect in a product … if the safety of the product is not such that persons are generallyentitled to expect.

This question of the safety standards that ‘persons aregenerally entitled to expect’ was considered in the2006 case of Tesco Stores Ltd v Connor Frederick Pollard.

Tesco Stores Ltd concerned a child who was 13 monthsold at the time of the incident in which he ingested



dishwasher powder from a plastic bottle which had been bought from Tesco.

The child became ill and a claim was made againstTesco and also the manufacturer of the plastic bottleon the basis that the bottle was defective.

In the county court the claimant was successful. The bottle had been secured with a ‘child resistantclosure’ (CRC) cap. However, although the cap wasmore difficult to open than a normal bottle, it did notrequire sufficient torque to open as would have beenneeded to comply with the relevant British Standard.The county court held that having elected to fit a CRC cap to the bottle, although there was no legalrequirement to do so with this dishwasher powder, the‘consumer was entitled to expect and would expectthe CRC to function at least up to the standard usuallyapplied to CRCs’.

However, the Court of Appeal (CA) reversed the firstinstance decision. The court considered the question of what were ‘persons generally entitled to expect’ ofthe safety features of the cap and bottle and held thatthe public were entitled to expect that the bottle wouldbe more difficult to open than if it had an ordinary screwtop. The public would be unlikely to be aware ofthe standard to which the product had been designedand the court was not willing to hold that there was anentitlement to expect compliance with these standards.

As the bottle was more difficult to open than an ordinary screwtop, even though it was not as difficult toopen as it should have been under the British Standardtorque measure, there was no breach of the Act.

In Alan Peter Ide v ATB Sales Ltd (2007), the claimant, MrIde, sustained serious head injuries after falling from hismountain bike.



The claim against the importers of the bike was basedon the argument that the handlebar of the bike suddenly snapped due to a defect and that thiscaused the claimant to lose control and fall off.

Conversely, the defendant denied that the handlebarwas defective and argued that the claimant had somehow lost control of the bike and that the fractureof the handlebar was a result, and not the cause, of the fall.

Mr Ide had been riding with two companions on theday of the incident, but they were riding somedistance behind him and did not witness the accident.Further, Mr Ide suffered from post traumatic amnesiaand had no recollection of events.

Therefore, on this occasion it was to be the expert evidence and an analysis of the circumstances thatwould be decisive in determining whether the handlebar had been defective.

After reviewing the expert opinion and the totality ofthe evidence, the court found for the claimant. Mr Idewas an experienced cyclist and there was no evidenceof a ‘hidden trap or lurking danger’ in the track wherehe fell off that would have explained the incident.Further, when Mr Ide was discovered lying on theground by his companions, he was still virtuallyastride the bike, which was supportive of the theorythat he had not lost control before the incident inwhich case it may have been expected that he wouldhave been thrown over the handlebars and away fromthe bike.

Summary

The CPA was introduced to enhance consumer rights,partly as a response to the Thalidomide incident, inwhich birth defects were caused by the drug.However, the claimant is still required to prove thatthe product that is alleged to have caused the damagewas defective.

In Ide, this involved an analysis of the evidence toprove that the incident was caused by a defect within

the product. On this occasion, the claimant was ableto satisfy the court that the handlebar was defectiveand had snapped causing the accident.

In contrast, in Tesco Stores Ltd, even though the screwtop bottle was not as hard to open as it shouldhave been under the British Standard, the court didnot consider that was enough to amount to a defectin the product, and the claim therefore failed.The wording of Section 3(1) of the Act is so widelydrawn that litigants face difficulty knowing whethercertain characteristics of the product will or will notbe held to be a ‘defect’.

Max EksteinSolicitor, BLM Manchester

Product liability - a Chinese perspective

China is entering an era of rapid growth. The Chinesecustoms authorities report that exports of Chineseproducts in 2007 reached a total value of $12,180billion, an increase of over 25% compared with 2006.Chinese-made goods are ubiquitous, particularly in theUS and Europe - if a consumer picks up a toy, a t-shirtor even a laptop computer, there is a good chance itwas made in China. With so many goods beingexported, the number of defects discovered willinevitably increase. High-profile product recalls, such as those of Mattel toys, made 2007 a controversialyear for Chinese-made goods, while the Chinese andJapanese authorities continue to exchange claims andaccusations over an allegedly contaminated dumplingdiscovered in Japan. However, claims in China havebeen less widely reported and this update summarisesthe damages available in the Chinese courts in productliability cases.

Damages in civil cases in China are generallycompensatory. The Product Quality Law, the GeneralPrinciples of Civil Law and the Consumer Rights andInterest Law provide detailed provisions on the parties



which may be held responsible for damages. Article 43provides that an aggrieved consumer may seekcompensation from the seller (if negligence can beestablished) and/or the product manufacturer (under astrict liability regime) and the general principles to beapplied in assessing such damages. A consumer mayusually claim under three heads of damages: generaldamages, mental distress or emotional injury, andpunitive damages.

General damages

Article 32 of the Product Quality Law, Article 119 of theGeneral Principles of Civil Law and Articles 41 and 42 of

the Consumer Rights and Interest Law provide similarprovisions on the damages that an injured consumermay recover. The Interpretation of Certain Issues forApplying the Law in the Trial of Personal Injury Cases,issued by the Supreme Court in December 2003,provides formulae for the calculation of damages inpersonal injury cases. The calculation of loss andexpense are closely connected to the claimant's costand standard of living and the place of the courtdetermining the claim, which gives significantlydifferent results for people in different occupations anddifferent localities - for example, an individual with cityresident status will be compensated according to amuch higher scale than a rural resident.

In general, legislation provides as follows:

If a product defect causes physical injury, theresponsible party is liable for:

� medical expenses� nursing fees during the period of treatment� loss of earnings� transportation costs� costs for necessary nutriment� rehabilitation costs (including the cost of aidsand equipment and future costs and expenses).

If the defect causes permanent disability, theresponsible party is additionally liable for:

� living expenses� disability compensation� living expenses for the disabled person'sdependents.

If the defect causes death, in addition to thecompensation above, the responsible party isadditionally liable for:

� funeral expenses� pension payments to the deceased's family � transportation and accommodation costsreasonably incurred by the deceased's relativesin preparing for and attending the funeral.

(The last two provisions are found in Article 17 of the2003 interpretation.)



If the product defect causes property damage, theproperty must be restored to its original state orcompensation must be paid at market value.

If the injured party suffers other serious losses, theparty responsible must pay compensation.

Mental distress or emotional injury

Mental distress and emotional injury are compensablegrounds for a claim. Article 8 of the Interpretation onCertain Issues for Ascertaining Liability for Mental Injuryin Cases of Infringement of Civil Rights, issued by theSupreme Court in 2001, provides that if the defectcauses serious injuries or other grave consequences -which includes serious or fatal personal injuries thatgive rise to a product liability claim - the courts mayaward damages for pain and suffering in addition toother compensation available under civil law. Article 9of the 2001 interpretation provides that, in assessing thedamages, the courts must take into account variousfactors, such as:

� the seriousness of the damage caused� the nature of the conduct that resulted in theinjuries

� the liable party’s ability to pay� the standard and cost of living at the placewhere the claim is filed - this is the mostsignificant criterion.

The compensation for each claimant is generally a smallamount, between Rmb5,000 and Rmb100,000. In theGas Stove Explosion Case a gas stove exploded in aBeijing restaurant where Jia, a 19-year-old high schoolstudent, was dining with her family. Jia suffered burnsto her face and hands. The injury rendered Jia 30%handicapped, with permanent scars that seriouslyaffected her appearance. Jia sued the manufacturer ofthe gas container, the manufacturer of the stove andthe restaurant jointly for compensation totalling nearlyRmb1.66 million (approximately $207,500), includingRmb650,000 in compensation for emotional distress.The Haidian People’s Court opined that the emotionaldistress Jia had suffered as a result of the accident wassubstantial, undeniable, obvious and compensable.However, in considering damages for emotional

distress, the court reasoned that compensationamounts must correspond to living standards andawarded Jia only Rmb100,000.

In Sue v Ma Bucai and Liu Zeyun, a 2004 case about thequality of powdered milk in Anhui province, the FuyangIntermediate People’s Court stated that the quality ofthe product sold by the defendants was far below thenational standard and resulted in the claimant sufferingfrom malnutrition. However, it awarded onlyRmb40,000 in damages for emotional distress.

Punitive damages

In general, punitive damages are not awarded inproduct liability cases in China. However, in the eventof fraud against a consumer, Article 49 of theConsumer Rights and Interest Law requires that themanufacturer and/or seller pay the consumer anamount equivalent to the price of the product as



punishment. Pursuant to Article 2 of the 2003interpretation, the recoverable damages may not bereduced unless the injured party is found to havecommitted a serious fault which significantlycontributed to the injury or loss that he or she suffered.

Comment

Chinese legislation provides for various heads ofdamages for claims by aggrieved consumers in productliability cases. The heads and amounts of damagesawarded are conservative compared to those in the USor even in most European jurisdictions. Furthermore,the laws provide guidance on the size of award only onthe basis of the residential status of a claimant in China;it is unclear how the courts would deal with a claim bya foreign claimant living abroad. It remains to be seenwhether the court would apply the highest level ofdamages available to a Chinese resident or wouldconsider that a foreign claimant should be judged onthe living standards of his or her country.

Terrence LeePartnerSmith & Partners, Asia

Consumer redress and ‘class actions’

In early May 2008, the government launched a reviewof the consumer protection regime in the UK. Part ofthis review seeks to investigate the options forimproving consumer empowerment and redress. Afacet of that debate concerns the method by whichmultiple consumers may pursue claims collectivelyagainst businesses who have caused their losses.

Policy makers in the UK and in Europe are increasinglyof the view that such claims could be efficientlypursued collectively, ie pursued together in a structuredand managed way. The debate that is emerging islargely around empowering large numbers ofconsumers who have suffered harm a) with access tojustice and b) an efficient process for resolving their

claims. Such an approach could bring benefits forbusiness who face the claims - if there are appropriatechecks, balances and protections.

However, there is a risk in so doing that the litigationculture leans towards a class action regime, importingthe perceived excesses of this model from NorthAmerica. European Consumer Commissioner Kuneva isaware of this concern among the business community,and addressed it directly in a speech in Lisbon:

To those who have come all the way to Lisbon to hearthe words ‘class action’, let me be clear from the start:there will not be any. Not in Europe, not under mywatch.

The Commission favours instead the term collectiveconsumer redress. It has since published a series ofbenchmarks against which to measure any futureproposals. The main elements are set out below.

� The mechanism should enable consumers toobtain satisfactory redress in cases which theycould not otherwise adequately pursue on anindividual basis.

� It should be possible to finance the actions in a way that allows either the consumersthemselves to proceed with a collective action,or to be effectively represented by a third party.

� Plaintiffs'(sic) costs for bringing an actionshould not be disproportionate to the amountin dispute. The costs of proceedings fordefendants should not be disproportionate tothe amount in dispute.

These principles themselves should not be controversial– indeed they are almost identical to those formulatedby Lord Woolf some 12 years ago and which led to thecurrent group litigation order (GLO) provisions inEngland and Wales. Although some 64 GLOs have beencertified since 2000, an influential body of opinion isemerging challenging the effectiveness of themechanism and pointing out its limitations.

For example, in a report issued in November 2007, the



Office of Fair Trading called for new procedures tofacilitate collective action by consumers following anti-competitive conduct by traders. And in February 2008,the Civil Justice Council (CJC) published researchexamining the ‘unmet need’ for collective redress whichis not presently served by the GLO mechanism.

Recent cases further underline the toe-hold thatcollective redress has gained in the UK litigationlandscape. First, the favourable resolution of therepresentative claim brought by Which on behalf ofconsumers against JJB Sports, for losses suffered due toprice-rigging of football shirts. Second, the obviousprocess inefficiency in the thousands of individual bankcharges test cases. Third, the collective settlementsecured by a US specialist class action firm for airpassengers who suffered losses arising from collusionby BA and Virgin in setting fuel surcharge levels.

Any UK collective redress mechanism could apply notonly to claims already suited to the GLO approach -such as product liability and mass transport accident

claims – but also to new areas such as environmentalclaims. Key sectors likely to be affected include food,agriculture, transport, retail and the pharmaceuticalindustry. Manufacturers, importers, retailers andlogistics companies should track this emerging issue.We expect further developments on the topic andfurther consultation in the second half of 2008.

Alistair KinleyHead of policy development, BLM national

DRI – the Voice of the Defence Bar

Who are DRI you may ask? The Defence ResearchInstitute (DRI), was founded in 1960 and has since provided an open forum for in-house counsel andlawyers to exchange ideas and information in the defenceof industry and business. Its base is in the USA and it hasa significant membership of over 22,000, and growing.The author’s interest in DRI follows over 10 years experience as external counsel representing anddefending product liability cases for a major German motor manufacturer. As with most major manufacturers and retailers, exposure to such claims inthe USA has always raised major concerns, not least withthe spectre of punitive damages awards. Theobvious advantages - the exchange of ideas andinformation, high quality training and an influential legislative voice, are compelling.

In February 2008, the author attended the latest ProductLiability DRI Conference. This year, (happily for theauthor), the conference was held in Phoenix, Arizona.Events such as these, together with involvement incommittee and publication of articles, provesimmediately beneficial to clients and BLM. Further, theopportunity to network with in-house counsel andlawyers in various jurisdictions proves highly stimulating.

There has become an increasing awareness of the benefits of DRI to the worldwide legal community. In the writer’s experience, the enthusiasm and



commitment of DRI members to serve their clients moreeffectively is significant. Following the success of DRI inthe US, it was no surprise that DRI Europe wasestablished in 2007 and it is expected that the addedbenefits to BLM and its clients who trade and manufacture within Europe will become apparent.

A key aspect in the development of DRI is the 25 committee led specialist groups. The committeeprovides and creates the agenda, and gives direction toeach of these groups. Although clearly well developed inthe US, it is hoped over time to replicate similar groupswithin Europe.

It is worth noting that in the regulatory area, DRI tracksand monitors developments throughout most jurisdictions including the EEC and this is particularlyhelpful and time saving to legal advisers and clients.

As you will see from Alistair Kinley’s article on classactions, EU Competition Commissioner Kroes’ views‘effective consumer redress as fundamental to the proper functioning of the EU single market’. It willdoubtless be appreciated that education, advice and co-operation amongst defence counsel, both in-houseand external, becomes fundamental to the effectivenessof its role.

It is the intention to keep you fully informed of news anddevelopments within DRI through Brand news.

Involvement by in-house counsel is encouraged as nodoubt you have much to contribute.

Chris CoughlinPartner, BLM LeedsDRI committee member of the international group (US)



BLM internationalproduct networkEvery manufacturer and supplier knows that itsbrands cannot be limited by domestic boundaries.Wherever they trade they must be able to do so inthe certain knowledge that they can protect thatbrand and its reputation in an increasinglycompetitive environment.

BLM works with a tried and tested network oflawyers who are used to protecting corporateclients throughout the world. The network has aparticular expertise in defending manufacturersand suppliers in product liability law suits, andbrand name and trademark cases.

For further details contact

Chris Coughlin: [email protected] Sherwood: [email protected] Benson: [email protected]



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If you have any questions about the services that BLM can provide, please contact one of the following:

DisclaimerThis document does not present a complete or comprehensive statement of

the law, nor does it constitute legal advice. It is intended only to highlight

issues that may be of interest to clients of Berrymans Lace Mawer.

Specialist legal advice should always be sought in any particular case.

BLM

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product liability

Events 2008BLM runs a comprehensive programme ofevents each year including seminars andworkshops. Below is a selection.

Product recall workshops*Practical workshops for retailers,manufacturers, insurers and risk managers.Due to the popularity of these workshops, itis recommended that you book early.

21 May and 26 JuneBLM London, London Wall andSeptember (date to be confirmed)Manchester

Supporting risk management**AIRMIC 2008 (17 - 18 June), stand 11Edinburgh International Conference Centre

ALARM 2008 (30 June - 1 July), stands 37 & 38Hilton Metropole, Birmingham

Claims reviews 2008* 20 November (New Century House,Manchester) 27 November (One Great George Street,London)

*For further details contact:[email protected]**For further details contact:[email protected]

Details of these events are correct at the timeof printing and may change. For up to dateinformation, visit www.blm-law.com

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