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The legal relationship created between manufactures and US consumers

An Overview of the legal relationship created between manufactures and US consumers.

This is a quick memo to simply outline the legal issues encountered by foreign corporations selling in the US Market. This memo will touch on the following issues:

Agency

An agent legally represents the manufacture. From a legal standpoint the agent stands in the shoes of the manufacture. An agent speaks and acts for the principal, the manufacture. As such the manufacture is liable for anything the agent says or does while representing the manufacture until the agency is terminated and that termination is communicated to interested third party consumers.

An agency relationship exists when a principal (in this case the manufacture or distributor) creates a legal relationship with a third party for the third party to represent the principal. In this case the third party is a retailer of products or an independent contractor sales representative. This relationship can be by contract (oral or written) or by actions on the part of either party (I’ll pay you if you do that).

An agency can be created without a legal relationship. Agency by Estoppel is created when third parties or consumers believe that one party has vested rights or an agency in another based on the actions of the principal. If a sales rep says he works for a manufacture and the manufacture does nothing to terminate the relationship or refine the relationship in the minds of the consumer or the shop then the agency does in fact exist. The parameters of the relationship are as defined by the consumer as reasonably interpreted from the actions of the agent. Failure to stop or disclaim the agency confirms the agency.

This places a tremendous burden on manufactures to create a relationship with agents that is within the parameters and/or restrictions the manufacture wants and then to insist the agent work within those parameters. However, if the manufacture does nothing to enforce the parameters or knows the agent is working outside of the parameters the manufacture will be held liable for the acts of the agent.

A good contract outlining the relationship is necessary for most independent contractor’s representative and required by seventeen (17) states.

Agency by law is another type of agency that is created. These are actions that the courts have interpreted over time to be agency relationships. A specific example in this case is again the manufacture and the distributor or the manufacture and the rep. Courts have determined that for the distributor or rep to do their jobs there is an agency relationship for the agent to act for the manufacture. Agency by law then is interpreted to mean the agent has the basic responsibility to act on behalf of the manufacture.

This places a burden on manufactures to do two things. (1) Hire agents who will understand and respect the agency relationship as defined by the manufacture. That then requires a well written contract that gives the agent freedom to do their job and at the same time reserves the rights and powers that the manufacture wishes to retain. (2) To act quickly when the manufacture sees someone acting outside of the defined relationship or a third party who is acting like an agent.

These place tremendous burdens on the manufacture. However the burdens were created to prevent the consumer, who has little or no way of checking on the relationship from getting ripped off.

Specifically a sales rep is the same as a bike shop, both are selling for the manufacture and the public can rely on both in the same way.

Warranties

A warranty is created every time there is a sale. Most warranties in the US are defined in the Uniform Commercial Code (UCC) and in a few cases state and federal laws. Specific Federal laws may affect the sale of certain items such as the Magnuson-Moss Warranty Act which covers warranties on automobiles.

In every sale the UCC states that there is a Warranty of Fitness and a Warranty for a Particular Purpose (UCC – ARTICLE 2 -§2-314 & 315).

§ 2-314. Implied Warranty: Merchantability; Usage of Trade.

(1) Unless excluded or modified (Section 2-316), a warranty that the goods shall be merchantable is implied in a contract for their sale if the seller is a merchant with respect to goods of that kind. Under this section the serving for value of food or drink to be consumed either on the premises or elsewhere is a sale.

(2) Goods to be merchantable must be at least such as

(a) pass without objection in the trade under the contract description; and

(b) in the case of fungible goods, are of fair average quality within the description; and

(c) are fit for the ordinary purposes for which such goods are used; and

(d) run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved; and

(e) are adequately contained, packaged, and labeled as the agreement may require; and

(f) conform to the promise or affirmations of fact made on the container or label if any.

§ 2-315. Implied Warranty: Fitness for Particular Purpose.

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under the next section an implied warranty that the goods shall be fit for such purpose.

As innocent as these warranties appear, they are the basis for product liability lawsuits and can be used to void more limiting warranties. However both of these warranties can be voided.

An example of the problem would be a camming device. The salesman states the camming device will work “no matter what.” The user drags the device through the mud so it is just caked and won’t work properly. The consumer uses the device, it fails because of the mud and the consumer is injured. The consumer could sue for their injuries under a breach of warranty theory because the device did not live up to the reason why it was purchased. This is a breach of the fitness for a particular purpose warranty.

Another example of the problem would be selling a bicycle. The salesman states the bicycle will be easy to ride. The new owner has never used a derailleur shifted gears on a bicycle and constantly has trouble shifting the gears. During one attempt to change gears the consumer hits a sewer grate suffering serious injuries. The consumer could sue for their injuries under a breach of warranty theory because the device did not live up to the reason why it was purchased. This is a breach of the fitness for a particular purpose warranty.

There is an out in the law that allows a manufacture to argue that the statements were salesman’s “puffing.” That means the statements that a salesman makes to sell a product that may be over the top. However because the warranty was not properly disclaimed the salesman’s puffing is not a valid defense. This may be in addition to any claim for basic product liability issues.

State Consumer Protection Laws

Each state has enacted a serious of Consumer Protection Laws. These laws are designed to “level the playing field” between consumers and large manufactures. Although the specifics may vary for each state in general the laws lower the threshold needed to prove a case against the manufacture and increase the damages for the consumer. In some cases damages are trebled, with interest costs and attorney fees being added to the damages.

Another disadvantage for manufactures is the manufacture can be forced to defend the action in the consumer’s state if products are sold in that state.

Colorado’s Consumer Protection Act, C.R.S. §§ 6-1-105 et seq has the following sections that would be of interest.

(1) A person engages in a deceptive trade practice when, in the course of such person’s business, vocation, or occupation, such person:

(d) Uses deceptive representations or designations of geographic origin in connection with goods or services;

(r) Advertises or otherwise represents that goods or services are guaranteed without clearly and conspicuously disclosing the nature and extent of the guarantee, any material conditions or limitations in the guarantee which are imposed by the guarantor, the manner in which the guarantor will perform, and the identity of such guarantor. Any representation that goods or services are “guaranteed for life” or have a “lifetime guarantee” shall contain, in addition to the other requirements of this paragraph (r), a conspicuous disclosure of the meaning of “life” or “lifetime” as used in such representation (whether that of the purchaser, the goods or services, or otherwise). Guarantees shall not be used which under normal conditions could not be practically fulfilled or which are for such a period of time or are otherwise of such a nature as to have the capacity and tendency of misleading purchasers or prospective purchasers into believing that the goods or services so guaranteed have a greater degree of serviceability, durability, or performance capability in actual use than is true in fact. The provisions of this paragraph (r) apply not only to guarantees but also to warranties, to disclaimer of warranties, to purported guarantees and warranties, and to any promise or representation in the nature of a guarantee or warranty; however, such provisions do not apply to any reference to a guarantee in a slogan or advertisement so long as there is no guarantee or warranty of specific merchandise or other property.

(3) The deceptive trade practices listed in this section are in addition to and do not limit the types of unfair trade practices actionable at common law or under other statutes of this state.

Colorado’s statute allows the judge to award treble damages, interest and attorney fees if the consumer is successful in the suit. C.R.S. 6-1-113. §§ Damages

Here again the warranties come into play. If the consumer can prove the warranties are not disclaimed and the claim falls within the deceptive trade practices act or a common claim for deceptive trade practices, the damages for the warranty claim are increased.

European Union certifications & the US

Many manufactures from Europe or Asia believe that meeting standards for manufacturing products in Europe is all that is needed to sell in the US. That is correct. However those standards provide no defense in a US Court against product liability claims.

Product liability lawsuits are lawsuits against the manufacture and all entities in the chain of the sale. A product liability action can be brought against the bicycle shop, the distributor and the manufacture of a product. There are three basic product liability claims.

  • Defective manufacture
  • Defective Design
  • Failure to warn

Defective manufacture claims are usually brought when only one product fails because there was a flaw in the manufacturing process for that product. The flaw caused an injury to the consumer using the product.

Defective design is usually the claim made when all of a type of product fails causing injury. A defective design claim can be brought at any time during the useful life of a product. This claim is brought when all of the products of a design fail for the same reason. The design flaw can either be based on the product breaking causing injury or the design preventing the product from working as advertised or as used by consumers.

The most difficult claim to defend is a failure to warn. This claim has two parts. Failure to warn at the time of the purchase and failure to warn of new issues the manufacture learns about. Failure to warn claims are the basics for information and warning labels that are not written in a manner to adequately inform the consumer of the risks of using the product.

Failure to warn claims that arise after time are usually a result of several Defective manufacture claims. Once a manufacture knows of problems in the way a product is being used OR that a product is being used incorrectly, the manufacture MUST warn all users of the problem. This type of claim in practice is similar to a product recall. However a product recall is done before an injury occurs. A failure to warn claim is the lawsuit brought after a recall.

The running of a warranty period does not end product liability claims.

Jurisdiction and Venue

Foreign manufacture believe that by setting up a US distributor, any lawsuit can only be brought against the US distributor and not the parent company in Europe. That is not true. US law allows a lawsuit against the end manufacture, wherever that manufacture is located if the manufacture entered the product in the stream of commerce in the state where the injury occurred or where the consumer lives. Proof of entering into the stream of commerce is a combination of factors: employees or agents living or working in the state; advertising in the state; contracting with retailers to sell the product in the state; advertising at events in the state are a few examples used to prove the manufacture entered the stream of commerce in a particular state.

In some cases, a manufacture can limit suits to just a few states with proper venue and jurisdiction clauses in their information to the consumer; however this is not always successful and will not work in all states. Either way, a foreign manufacture will be brought into the US to defend a product liability claim.

What do you think? Leave a comment.

Copyright 2010 Recreation Law (720) Edit Law, Recreaton.Law@Gmail.com

© 2010 James H. Moss

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