Sixth Circuit Refuses to Apply Kentucky’s Economic Loss Doctrine to Purchases by Consumers

The Sixth Circuit recently held that it would not apply Kentucky’s economic loss doctrine to consumer purchases, and consumers are free to pursue tort claims against manufacturers even when damage occurs only to a product itself.

The Sixth Circuit was sitting in diversity and ruled in State Farm Mut. Auto. Ins. Co. v. Norcold, Inc., that the plaintiff could pursue its product liability claims and the economic loss doctrine was inapplicable to the plaintiff’s subrogation action under Kentucky law. Plaintiff State Farm provided property insurance to its insured (an individual) who purchased a used recreational vehicle (RV). The RV came equipped with a Norcold refrigerator that was incorporated into the vehicle by the RV manufacturer. About a year after the RV was sold to State Farm’s insured the refrigerator caused a fire.

The fire caused no personal injuries or property damage other than to the RV itself. State Farm paid its insured for the damage and brought a subrogation claim against the refrigerator’s manufacturer, Norcold.

Norcold argued that Kentucky’s economic loss doctrine precluded State Farm’s product liability claims, and State Farm was limited only to contract damages. State Farm argued that Kentucky’s economic loss doctrine would not apply because the purchaser of the RV was a consumer, and not a commercial entity. The Sixth Circuit agreed with State Farm.

The Sixth Circuit noted that the Kentucky Supreme Court had not ruled specifically on whether the economic loss doctrine applied to consumers. Kentucky’s Supreme Court only recently adopted the economic loss doctrine in Giddings & Lewis, Inc. v. Indus. Risk Insurers, 348 S.W.3d 729 (Ky. 2011), which dealt with application of the doctrine to a product purchased by a commercial entity. The Sixth Circuit used Giddings & Lewis, Inc. as guidance and predicted that the Kentucky Supreme Court would not apply the economic loss doctrine to a tort claim brought by an consumer.

In Giddings & Lewis, Inc. the Kentucky Supreme Court limited its ruling specifically to commercial purchases, and provided three policy reasons for applying the economic loss doctrine to those transactions: (1) maintaining the distinction between tort and contract law; (2) protecting the freedom to contractually allocate economic risk; and (3) encouraging the party best situated to assess the risk of economic loss to insure against that risk. The Sixth Circuit in Norcold, Inc. determined that these policies would not be satisfied by applying the economic loss doctrine to consumers. Specifically relating to (2) and (3).

The Sixth Circuit held that consumers are typically unsophisticated purchasers who do cannot engage in meaningful negotiations with a manufacturer and are often unaware of inherent risks of a product. Additionally, the court found that a manufacturer typically has a better understanding of a product’s performance than an average consumer, and the manufacturer can better insure against the risk of the product failing to perform.

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Watts Agrees to Settle Two Class Action Lawsuits Re Appliance Connectors

From the moment plumbing went indoors, there was the potential for water damage to buildings from faulty plumbing. And, the addition of appliances only increased the potential. But, what about the connection between the indoor plumbing and the appliance? The water pipes in a structure have to connect somehow to appliances that use water, like faucets, toilets, dishwashers and hot water heaters. These connectors are often times flexible connectors that allow for movement of the appliance for installation, maintenance and repairs. And, sometimes, these connectors are a vulnerable weak point in the water supply system resulting is major water leaks and significant property damages.

Watts Regulator Co. (“Watts”) is a company that, in addition to many other things, makes products to connect water pipes to appliances. Recently, Watts was sued by class action plaintiffs over alleged defects with certain appliance connectors, including one that was branded in a way that would indicate it would keep the user safe from water damages – the Watts Floodsafe® connector. However, it appears that at least the class action plaintiffs in two recent lawsuits believed otherwise.

In the past two years, two separate class action product liability lawsuits were brought against Watts Regulator Co. in the United States District Court for the District of Nebraska in the past two years. Sharp, et al v. Watts Regulator Co., involves claims related to the Watts Water Heater connector product (“Water Heater Connectors”), and Klug, et al. v. Watts Regulator Co. involves claims related to the Watts Floodsafe® connector product (“Floodsafe Connectors”). Both of these cases have recently been settled, and the settlements apply to anyone who owns or owned (or leases or leased) a residence or other structure in the United States containing either a Watts Water Heater Connector or Floodsafe Connector after November 4, 2008. This settlement includes persons who suffered property damage and/or paid to repair property damage (including subrogated insurance carriers) caused by the alleged failure of these products.

The Floodsafe Connectors were designed and sold for use with faucets, toilets, washing machines, dishwashers and icemakers. A Floodsafe or Water Heater connected with a label that identifies Watts, Watts Regulator, Anderson Barrows, Savard, Everbilt, Ace Hardware, Wolverine Brass, Do-It-Best, Grainger, CalFlex, MainLine, Aqua-Flo, Belanger, Danco, Flexconnex, Diamond Back, Lincoln, Mabe, PlumbMaster, PlumBest, PurePro, Kenney, Electrolux or Kenmore may qualify if the connector has certain physical features. The physical features for the Floodsafe connector include a check valve on one side of the connector, and for the Water Heater connector they include a red disc near both ends of the connector.

The time to opt out of the settlement ends March 7, 2017. So, any effort by a potential settlement class member to opt out of the settlement, and be able to file litigation against Watts directly must be made immediately. After March 7, 2017, a settlement class member will be bound by the terms of the settlement.

Under the settlements, Watts has agreed to pay $14 million in total, $10 million into a settlement fund for Water Heater connectors and $4 million into a settlement fund for Floodsafe connectors. However, this fund will also be used to pay for notice, administration, litigation expenses, and attorneys’ fees too. So, if a settlement class member intends to seek funds from the settlement, it would be best to act quickly in that regard as well.

Terms and information regarding these class action settlements, and photographs to help identify the related products, can be found at www.ConnectorSettlements.com.

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CPSC Advises Voluntary Industry Standards for Rechargeable Batteries Inadequate

On January 23, 2017, Samsung announced that poorly designed and manufactured batteries are to blame for the fires associated with its Galaxy Note 7 phones.

The announcement comes after months of investigation by Samsung and three independent industry organizations. The investigation revealed problems with both the batteries that were originally used in the phone during its launch in August, as well as the batteries that were later used as replacements.

According to the results of the investigation, the outer casing for the first battery – manufactured by Samsung SDI – was too small to accommodate the internal components, allowing the components to short circuit and overheat. The second battery – manufactured by Amperex Technology – suffered from other design defects and a missing key component.
Samsung discontinued the Note 7 last year and agreed to recall 1.9 million phones after negotiations with the Consumer Product Safety Commission following several reports of the phones catching fire. Despite the worldwide recall, some customers have refused to stop using the phones.

On January 24, 2017, the CPSC, which is conducting its own investigation, issued a press release, stating that the industry’s voluntary standards for the design and manufacture of rechargeable batteries aren’t adequate. Those standards were first developed in 2006 and haven’t been revised since 2011. According to the press release, the CPSC and Samsung are working with the industry to “take a fresh look” at the standards.

“Industry needs to learn from this experience and improve consumer safety by putting more safeguards in place during the design and manufacturing stages to ensure that technologies run by lithium-ion batteries deliver their benefits without the serious safety risks,” CPSC Chairman Elliot Kaye stated in the release.

The current investigation by the CPSC is just the latest in a series of investigations raising concerns about the safety of lithium-ion batteries. The batteries are attractive to manufacturers because they hold power more efficiently and last longer than other power packs. However, they have also raised safety concerns because the chemicals inside the batteries hold so much energy that a failure can result in a fire or even a small explosion.

We will continue to monitor and blog about updates from the CPSC’s efforts to work with manufacturers to implement updated standards.

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Product Liability Claims When The Product Has No Manufacturer Label

There are many impediments to a successful investigation of a product liability claim – age of the product, preservation of evidence, chain of custody of the evidence, installation markings, etc. This article will discuss situations where there is a lack of identifying information on the product.

Products Lacking Manufacturer Identification

Picture the scenario where the insured suffered a water loss and the investigator easily determined cause and origin as the failed water supply line. But after expert examination the product possesses no markings as to identify a manufacturer, model or product number. Even your well-educated and experienced investigator advises that he/she is unable to identify the product’s maker.
A lack of identifying information on a product not only weakens a product defect case, but can stop the case dead in its tracks. The reasons for the lack of product identification can vary. Over time, through corrosion and suffering the elements, a product’s identification label can wear off. The lack of product identification may also be a result of the water or fire damage of the incident. Alternatively, the product many not have ever had any product information.

Is there a requirement for manufacturers to label products with some sort of information to identify the make, model, and age? In fact, the U.S. Consumer Product Safety Commission generally does require labeling on products and packaging. However, labeling requirements differ based on the type of product, posed hazards, foreseeable uses, etc.

Additional Methods to Identify a Product

If you are dealing with a product that caused your loss, but there is no label readily indicating the source, there are other ways to identify the manufacturer. The insured, contractors, subcontractors, installers, maintenance personnel, etc., can all be questioned. You can also investigate whether the product is original to the construction of the property; whether the insured, contractor, installer, maintenance worker, etc. has invoices or record logs on products used on the property; whether the contractor, installer, maintenance worker, etc. utilizes only particular brands; whether the purchaser only purchases products at particular supply stores, etc. It is possible that after these inquiries, the manufacturer of the product can be identified.

Another great resource are experts, which may have seen a similar looking product or can provide an opinion based on experience as to the manufacturer. Some experts and vendors catalogue exemplars of products for the specific purpose of assisting customers with product identification. However, as you can imagine, the catalogue must be quite extensive, frequently updated, and easily searchable to be effective. In some cases a simple label or identifying mark on a product can lead to the manufacturer of the product.

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Washington’s Independent Duty Doctrine – Actual Injury or Prop Damage Not Required

Since recently departing from the economic loss rule, Washington courts have continued to expand the scope and applicability of the independent duty doctrine in a variety of circumstances. A recent appellate case, The Point at Westport Harbor Homeowners’ Association v. Engineers Northwest, Inc.,[1] further enlarges the doctrine to include scenarios where no actual property damage occurs but only the threat of future damage.

Until 2010, Washington courts traditionally adhered to the economic loss rule whereby plaintiffs were prevented from recovering “economic” damages in tort and were required instead to pursue such damages in contract claims. The doctrine presented significant barriers for plaintiffs, especially in cases where the defendant was clearly negligent but a lack of contractual privity prevented the plaintiff from recovering economic damages. This all changed in 2010 when the Washington Supreme Court replaced the economic loss rule with the “independent duty doctrine.”[2] Under the new approach, a plaintiff can recover for economic losses if the defendant is shown to have breached a tort duty independent of any contract.[3] Since its adoption, Washington courts have continued to expand the scope of the independent duty doctrine in various circumstances.

This latest case involves construction defect allegations brought by a condominium homeowner’s association (HOA) against various defendants arising out of the development and construction of The Pointe Condominiums at Westport Harbor. The suit included negligence claims against the structural engineering firm, Engineers Northwest, Inc. (ENW). Specifically, the HOA alleged that the condominium buildings suffered from both design and construction defects that rendered it “unreasonable dangerous to its occupants” in the event of a seismic event. The HOA sought compensatory damages only for the costs of investigating and repairing the deficiencies, and did not allege any consequential injuries to persons or property arising from the defects themselves. Notably, the HOA did not have a contractual relationship with ENW, which was hired directly by the developer.

ENW moved for summary judgement arguing, among other things, that the independent duty doctrine barred negligence claims for harm that was in effect an economic loss. ENW acknowledged that it was responsible for some of the alleged construction defects; however, it argued that any tort duty it bore was limited to only those cases where its negligence resulted in personal injury or actual physical damage to property. Thus, because the HOA alleged only “potential damage” and not actual property damage to the condominium buildings, it could not maintain a claim under the independent duty doctrine.[4]

ENW’s motion for summary judgement was denied by the trial court. In affirming, the Court of Appeals first held that despite not having a contractual relationship with ENW, the HOA nevertheless possessed a legally protected interest in the condominium buildings such that ENW owed it a reasonable duty of care.[5] The Court went on to hold that a structural engineer’s independent duty of care “encompasses, inter alia, the prevention of safety risks . . . . [e]ven where such safety risks do not cause consequential damage to persons or property.”[6] Consequently, the HOA could maintain a claim against ENW for its failure to design a building that was structurally sound pursuant to the independent duty doctrine.

This latest case marks a trend of expanding opportunities for subrogating carriers to recovery from potentially responsible third parties under the independent duty doctrine. In the property damage context, it is no longer necessary to show actual property damage in order to establish liability, rather the mere impairment of a building or other item of property may suffice. Conceivably, this could create third-party liability in a slew of claims that ordinarily would not present recovery potential and subrogating carriers should seek to recognize these new opportunities.

Footnotes:

Westport Harbor, 193 Wn. App. 695 (Div. II May 3, 2016).
Affiliated FM Insurance Co. v. LTK Consulting Services, Inc., 243 P.3d 521 (2010).
Eastwood v. Horse Harbor Foundation, Inc., 241 P.3d 1256 (2010).
Westport Harbor, 193 Wn. App. 695 at ¶ 21.
Id. at ¶ 20.
Id. at ¶ 23 (citing Affiliated FM, 243 P.3d at 529-30).

 

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“Smart Cars” – NHTSA Investigation for Potential Fire Hazard

The National Highway Traffic Safety Administration has opened a preliminary investigation into 42,875 model year 2008-2009 Fortwo vehicles (“Smart Cars”). The term “Smart Car” refer to the Smart Fortwo originally introduced in Europe. They are small two seat vehicles with arguable underpowered engines. The Smart Car was developed as a partnership between Mercedes-Benz and Swiss watchmaker Swatch. The first American imports arrived stateside in 2007.

The NHTSA investigation was opened due to eight complaints from consumers related to engine compartments located in the back of the vehicles catching fire. Below is an image of a 2008 Fortwo subject to the preliminary investigation.

The complaints include fires that happened while being used and also parked. In six of the complaints owners relayed the vehicles filled with smoke, had a check engine light illuminate or heard unusual noises while driving. Two other incidents were detected after the vehicles were stopped. The vehicles were seven to eight years old with five taking place in 2015 and three in October of 2016.

One complaint from a 2008 Fortwo user indicated smoke came out of the dashboard. Her son was able to get out and run to call 911. While calling he heard the car explode with the entire car burning.

A link to the full NHTSA preliminary evaluation notice is here.

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The Saga Continues – SB 800 Update – California’s Right to Repair Act

fireThe Right to Repair Act has reared its ugly head again. In Elliott Homes, Inc. v. Superior Court (Hicks) 2016 DJAR 11930, the Third Appellate District issued a writ of mandate ordering a stay of pending litigation until plaintiffs satisfied the pre-litigation procedures mandated by the Right to Repair Act.

Plaintiffs brought a construction defect action against the builder of 17 single-family homes. Their operative complaint alleged common law causes of action for strict products liability; strict components product liability; and negligence. No statutory violations were alleged under the Right to Repair Act, as plaintiffs did not provide pre-litigation notice of the alleged defects to the builder.

The trial court, relying on the Liberty Mutual Ins. Co. v Brookfield Crystal Cove (2013) 219 Cal. App. 4th 98 and Burch v Superior Court (2014) 223 Cal. App. 4th 1411 decisions, ruled that the Right to Repair Act did not require a stay, as only common law causes of action were pled. The Appellate Court held that the statutory scheme was intended to apply to both claims for defects that had not yet caused damages (economic damages) as well as those seeking actual damages.

The threshold question-whether the Right to Repair Act precludes a homeowner from bringing common law causes of action for defective conditions resulting in physical damage-will soon be answered. That issue is pending before the California Supreme Court in McMillin Albany, LLC v. Superior Court (2015) 239 Cal. App. 4th 1132. That decision will definitively explain the scope of the Right To Repair Act, once and for all. Until then, insureds and their subrogating carriers would be well-advised to provide builders with pre-litigation notice of construction defects as mandated by the Right to Repair Act.

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Lithium Battery Fires and CT Scans

batteryOn October 13, 2016, Roylco Educational Light Cubes were recalled because its lithium battery can overheat and catch fire. On the same day, Samsung expanded its recall of the Galaxy Note7 Smartphones based on additional incidents with the replacement phone’s lithium battery overheating and catching fire. On September 20, 2016, Denon recalled its rechargeable battery packs due to the same issue. And, on July 6, 2016, approximately 11 different sellers of self-balancing hoverboards issued recalls due to lithium battery fire hazard. Moreover, there have been reports of lithium battery fires in drones and other battery charged products. So what’s the issue causing these recalls and fires:

In really basic terms, a lithium-ion battery is made-up of: (1) lithium-ion cells; (2) a temperature sensor; (3) a voltage converter; (4) a regulator circuit; (5) a notebook connector; (6) a voltage tap; and (7) a battery charge state monitor. The problem occurs in the lithium-ion cell. Among other things, the lithium-ion cell has a metal case that encloses an organic solvent electrolytic solution with a positive electrode and negative electrode separated by a thin plastic separator sheet. When the battery charges, ions of lithium move from the positive electrode to the negative electrode and back again through the separator sheet causing each cell to generate about 3.7 volts. However, if the positive and negative electrodes touch the battery will heat-up and short. The heat causes the cell to expel the electrolytic solution, which will ignite from the heat of the battery.

As with all fire cases, it is important the fire scene is kept preserved and unaltered until such time as all parties are placed on notice and have an opportunity to jointly inspect the scene and retain evidence. These inspections (at the scene and later in the lab) should be done jointly between the injured party, the seller of the product, the manufacturer, and the insurers of each in order to limit spoliation defenses. Prior to destructively examining the battery, it should be scanned by a CT scan. A CT scan makes use of computer-processed combination of many X-ray images taken from different angles to produce cross-sectional (tomographic) images (or virtual “slices”) of specific areas of a scanned object, allowing the user to see inside the object without cutting. The CT scanned images can show the exact failure. Therefore, it is an important step in the forensic investigation, and can be very persuasive evidence in proving a failure mode and resolving a claim.

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Part 36: Settle or Face the Consequences

settlementIn England, parties to a dispute are encouraged to settle cases through the use of Part 36 of the Civil Procedure Rules (“CPR”). The rationale of the Part 36 regime is to encourage settlement. If a party rejects an offer made under Part 36, and subsequently fails to beat the offer later on in the case, they face an increase of legal fees under the Part 36 regime and the “loser pays” rule.

On 6 April 2015, the provisions of Part 36 changed. There have only been a small number of reported decisions under the new regime. An interesting aspect of these changes relates to the scope of Part 36. Now the Part 36 regime is compatible with cases subject to appeal proceedings (CPR 36.4(2)), and clarifies the operation of Part 36 in the case of a counter-claim (CPR 36.2(3)). It seems incredible that it took a change in the rules to make it explicit that the defendant is able to make a claimant’s offer in respect of his counter-claim.

The changes have also made the drafting of a Part 36 offer much easier. Now, you no longer need to explicitly state that an offer is intended to have the costs consequences of Part 36. It is merely enough to just state that it is a Part 36 offer. Further, Part 36 offers can be structured so that they are automatically withdrawn after a certain length of time, although there is an obvious question mark over the usefulness of making a Part 36 offer that is automatically withdrawn and it cannot therefore have the costs consequences of Part 36.

Although there are other more technical changes to the Part 36 regime, one of the most interesting changes is that it is now possible to make another Part 36 offer without extinguishing a previous offer. This means that a party to an action is free to stack offers to (hopefully) accommodate any outcome and provide them with the necessary costs protection afforded under Part 36.

Another exciting change to the Part 36 regime is that a judge involved in a split trial can be told about the existence of an offer once the first part of the split trial has been concluded. This allows them to know of the Part 36 offer made before making costs orders following the determination of a preliminary issue. This can be nerve racking to a party that chose to gamble and reject a reasonable offer made by another party to avoid the need for a preliminary issue hearing.

Although Part 36 offers have been part of litigation life for many years in England, the new changes to the Part 36 regime seem long overdue. Parties are now finally being held to account regarding the offers that they make under the Part 36 regime. Provided the offers to settle under Part 36 represent a genuine concession, the Court does not need to apply the cost consequences applicable to Part 36. Now claimants cannot just make a Part 36 offer for their entire claim, to secure a higher cost award under Part 36, if they win. They must demonstrate their intentions to the Court that show that the offer was a genuine attempt to settle the claim. Part 36 offers are the litigation weapon of choice. If deployed strategically, they can increase the pressure on the opposing party. There is nothing harsher than winning a case, only to realize that you have been out litigated by the losing party, and you now have to pay their legal fees despite your victory.

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Recalls of Lithium-Ion Laptop Batteries Continue

laptopfire-1Despite over a decade of laptop battery recalls, one of the latest chapters in the lithium-ion fire hazard saga unfolded on June 23, 2016, when HP issued a sweeping recall of batteries installed in its notebook computers. The particular lithium-ion batteries subject to the recall, the company states, “have the potential to overheat, posing a fire and burn hazard to customers.” The Consumer Product Safety Commission is currently advising owners of laptops containing batteries covered in the recall to stop using them immediately, remove the battery, and contact HP for a free replacement. The recall covers approximately 41,000 devices sold between March 2013 and August 2015. Models affected included the HP Probook, HP Envy, Compaq Presario, and HP Pavilion notebook computers.

This recall comes on the heels of an unprecedented string of recalls issued by HP over the last two months involving similar lithium-ion batteries. Over the first half of 2016, recalls of lithium-ion batteries installed in HP and Compaq laptop computers reportedly total over 200,000 units.  Since spring 2010, HP has reportedly received at least 40 reports of lithium-ion laptop batteries overheating and rupturing. Several of these incidents have caused personal injuries to owners and nearly all have resulted in property damage. A complete list of model numbers and battery bar codes associated with the ongoing recall can be found at the CPSC website.

The recent flood of recalls across the industry further solidifies the fire hazards posed by lithium-ion batteries. Claimants seeking damages from overheating batteries have an increasingly easier path to establishing a product defect and ensuing liability, especially if the specific lithium-ion battery is subject to a recall. But the window to pursue claims premised on a product defect or negligence theory may not stay open long. As time passes and more batteries are recalled, potential plaintiffs will begin to face the growing obstacle of comparative negligence for failing to timely respond to a prior recall. For now, claimants should remain cognizant of the relevant timeframe between the date of loss and corresponding product recall when evaluating liability.

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