“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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Compliance With Hague Convention When Serving Foreign Entities

world-1In today’s economy, it is no surprise to find that the product at the heart of a product liability suit was manufactured by a company outside of the United States. But properly serving that foreign manufacturer appears to cause some confusion. If strategy dictates the need for a claim against a foreign entity, especially in a product liability suit, it is necessary for the plaintiff to properly serve them under a hybrid of U.S. and international law.

This lesson was recently imparted on a subrogee attempting to bring suit against a South Korean company. Allstate Ins. Co. v. Hewlett-Packard Co., 2016 U.S. Dist. LEXIS 18155 (M.D. Pa. Feb. 16, 2016). The plaintiff’s insured purchased a computer that overheated, caused a fire, and resulted in significant property damage to the insured’s home. During litigation, the plaintiff learned that a potential cause of the fire was the computer’s battery, manufactured by Samsung SDI Co. Ltd., a South Korean company. The plaintiff filed a complaint against both Samsung’s South Korean company and its domestic company (Samsung SDI America, Inc.). The relevant issue arose when Samsung’s South Korean entity argued the plaintiff failed to properly serve it under the rules of the Hague Convention, and did not even attempt service until 14 months after filing the complaint.

Any nation that is a signatory of the Hague Convention—which includes the U.S. and the Republic of Korea (aka “South Korea”)—must follow its guidelines when bringing suit against a resident of another signatory. Federal Rule of Civil Procedure 4(f) provides for application of the Hague Convention in such situations. In part, this requires a U.S. plaintiff to contact the foreign signatory’s “central authority” (established to receive requests for service), and then have service performed in accordance with that nation’s internal law. That central authority will provide a certificate of service that states whether service has been performed, the method of service, and the place, date, and person on who service was made. This certificate is then filed in the U.S. court.

Equally important is the time in which to make service on the foreign entity. A plaintiff generally has 90 days to serve a party after filing the complaint, pursuant to Federal Rule 4(m) (this was a recent change from the 120 days prior to the December 2015 amendments to the Rules). Yet, the Rule makes exception and does “not apply to service in a foreign country.” Fed. R. Civ. P. 4(m). But as courts consistently remind us, this does not eliminate a timing requirement. See, Allstate Ins. Co. v. Hewlett-Packard Co., 2016 U.S. Dist. LEXIS 18155, at 12. Instead, courts generally look to see whether the plaintiff diligently attempted service during that time period. Id.

The plaintiff here failed to follow these requirements, and the court dismissed its action against the South Korean entity. The record showed the plaintiff filed an unsworn certificate of service attached to an untranslated document (apparently in Korean) along with its filing. Without any translation accompanying the Korean documents, the court was unable to determine whether service was made in conformance with the Hague Convention. This led the court to dismiss the action for a failure of service.

The court also discussed the defendant’s alternative argument that service was not attempted within a reasonable amount of time. In its ruling, the court found the plaintiff failed to even attempt service until 14 months after the complaint was filed. This, the court held, was an “extraordinary delay,” without good reason, and therefore, stated this was an additional reason to dismiss the complaint against Samsung’s South Korean entity. Although service typically need not be completed within the timing restraints of FRCP 4(m), it must at least be attempted in good faith.

Once it appears that suit will be brought against a foreign entity, it is necessary to determine whether the foreign nation is a signatory of the Hague Convention. If so, there can be no delay in following its guidelines if the plaintiff wants to avoid a dismissal of its claim.

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Subcontract Language Can Prevent Enforcement of AIA Waiver of Subrogation

contract-1The United States District Court of Maryland recently held that a waiver of subrogation clause found in an AIA agreement can be superseded by subsequent contract language between the contractors. In Turner Construction Co. v. BFPE Int’l, 2016 WL 1169938 (D. Md. Mar. 25, 2016), a general contractor brought suit against its subcontractor for property damage that occurred during renovations of a commercial property. The subcontractor argued that it was free from liability pursuant to the waiver of subrogation clause found in the prime contract between the owner of the property and the general contractor (AIA Document 201-2007™) (the “Prime Contract”).

At issue was the battle between provisions from two separate contracts: (1) the Prime Contract between the owner and the general contractor; and (2) the Subcontract between the general contractor and the subcontractor. The Prime Contract included a waiver of subrogation clause that the subcontractor sought to enforce; it stated “[t]he Owner and Contractor waive all rights against . . . each other and any of their subcontractors” (emphasis added). On the other hand, the Subcontract included an assumption of liability clause wherein the subcontractor “assumed the entire responsibility and liability for any and all actual or potential damage or injury of any kind whatsoever . . . to all property . . . caused by, arising out of or occurring in connection with the execution of the [Subcontract] Work.”

The subcontractor attempted to invoke the waiver of subrogation clause found in the Prime Contract and moved for summary judgment. At bottom, the two competing interests were whether the Prime Contract’s waiver was applicable to a subcontractor who was not a signatory, or whether the Subcontract’s assumption of liability clause applied.

Although the court recognized that in some instances other courts found that a subcontractor can rely on the waiver of subrogation clauses in prime contracts, no case dealt with an assumption of liability clause as strong as the one at issue here. The court stopped short of ruling that the assumption of liability clause controlled, and instead, determined that because of the ambiguity as to the parties’ intent between the Prime Contract and Subcontract, additional extrinsic evidence was needed. But tellingly, the court recognized that the burden to enforce the waiver was on the subcontractor, and without extrinsic evidence displaying the parties’ intent that the waiver controlled, the assumption of liability found in the subcontract would be enforced.

In reaching this decision, the court stated that this may be a “case in which the obvious public-policy benefit of orderly and predictable insurance planning at the outset of a venture must yield to the explicit arrangements between a general contractor and the subcontractors with which it chooses to transact.”

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Michigan Court of Appeal – Waiver of Subrogation Clause Does Not Preclude Gross Negligence Claims

waiver.1In a Per Curium unpublished opinion dated August 9, 2016, an intermediate appellate court in Michigan overruled a trial judge’s grant of summary judgment based on a waiver of subrogation but affirmed the ruling that the plaintiff had not plead sufficient facts of gross negligence to state a claim. The subrogated claim involved an alleged failure of a dry pipe sprinkler system. The general contractor and a subcontractor moved for summary judgement based on a standard waiver of subrogation provision in the form contract. The plaintiff agreed the ordinary negligence claims were barred but public policy precluded exculpating oneself from gross negligence and opposed the motion. The trial court granted summary judgement on the grounds that it failed to state a claim for gross negligence and the claim for gross negligence was barred by the statute of limitations. The trial court specifically did not address whether the waiver of subrogation clause barred the claim for gross negligence.

On reconsideration, the court reversed its ruling on the statute of limitations issue and also held that the waiver did bar claims for gross negligence. The plaintiff appealed.

The court of appeals held that the trial court erred in dismissing the claim for gross negligence based upon the waiver of subrogation clause citing Michigan law that a party cannot by contract protect oneself from gross negligence or willful and wanton misconduct. In a footnote the court recognized an argument advanced by the defendants that the public policy concerns regarding gross negligence may be weaker or non-existent in a sophisticated commercial setting involving the allocation of the risk of property damage. “Nonetheless, the language of the cited cases is broad, and is not limited to non-commercial settings.” The court concluded by stating it was unnecessary to consider the issue further in light of its affirmance on the ground that plaintiff had failed to state a claim of gross negligence under the facts.

The reasoning in Lexington Ins. Co. v. The Alan Group, No.326921, Mich. App.; 2016 Mich. App. LEXIS 1486 can be helpful for subrogating carriers in cases in Michigan involving waivers of subrogation if the facts support a claim for gross negligence or willful and wanton conduct. Since the decision is unpublished, court rules may limit its precedential value.

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Subrogation in the Internet Age: Claims Against Online Providers

online shopping picRecently, a subrogation action was filed on behalf of an insurer alleging that a product sold on eBay and Amazon caused a fire for which the insurer is seeking recovery. The action was filed in state court and thereafter removed to federal court. This lawsuit again reminds us in the subrogation world of the difficulty the law is facing in applying 20th Century tort concepts to the internet age.

The law of strict liability for products was created in California in the early 1960s and developed through the end of the 20th Century. Most states have some form of strict product liability either by way of statute or common law. At its core, this development in tort law attempted to shift the burden for harms created by products manufactured in the modern age to manufacturers and sellers rather than consumers. In the most simplistic setting, you would have a single manufacturer who sold the product to a distributor who sold it to the public. Component part manufacturers and multi-level distribution chains will, of course, add nuances and complexity. Legislatures and courts address those issues in product liability statutes or decisions applying the law to specific facts.

With the advent of the internet and companies like eBay and Amazon, the picture became even more complex. Internet providers sometimes act as matchmakers pairing sellers with buyers or allow individual to buy items, mark them up, and re-sell them. The first issue this internet driven fact pattern creates is determining exactly who is a seller or distributor in a given transaction and whether a particular state statute or common law doctrine applies to the individuals or companies in the chain after the product leaves possession of the manufacturer.

Another issue that must be addressed is the Communications Decency Act (“CDA”), 47 U.S.C. §230. The CDA was Title V of the Telecommunications Act of 1996. The original intent of the Act appears to have been an attempt to regulate pornography and obscenity in cyber space. Nevertheless, at least two courts have held that the broad immunity provisions established by Congress in the CDA barred all claims filed against internet-service providers for the sale of products that allegedly caused harm.

In Hinton v. Amazon.com.dedc, LLC, 72 F. Supp.3d 685 (E.D. Miss. 2014), Judge Starrett dismissed a claim against Amazon and eBay alleging negligence, intentional conduct, gross negligence, breach of the implied warranty of merchantability, failure to warn, breach of the duty of good faith and fair dealing, violation of the Mississippi Consumer Protection Act, and violation of federal law. The judge noted that eBay had been held immune under the CDA in federal and state litigation concerning the sale of defective or illegal items, and concluded that all of the purchaser’s claims against eBay arose from the publication of information created by third parties and, therefore, that CDA immunity would attach in the absence of a statutory exception.

In Inman v. Technicolor USA, Inc., 2011 WL 5829024 (W.D. Pa. Nov. 18, 2011), Chief Judge Lancaster dismissed a product liability claim under Pennsylvania law against eBay based on the CDA’s immunity provision. The “sale” was “facilitated by communications for which eBay may not be held liable under the CDA.”

We can expect further cases on this topic as more are more products continue to be sold via the online marketplace. As this area develops, we will continue to provide updates.

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Soy Based Wiring Coating – Potential Attraction for Mice

mouse.1The old joke in school used to be, “…the dog ate my homework.” Well, now, as a consequence of manufacturers moving toward more “green” ecologically fashionable products, the wiring in automobiles and common outdoor appliances is becoming feast food for rats, mice and vermin.

The intention for utilizing “soy” based wiring coatings was to eliminate greater use of plastics which are less biodegradable in the environment. However, usage of this type of wiring in vehicles and appliances has resulted in an all too inviting prise du jour for small fur covered creatures.

Various lawsuits have been filed alleging that manufacturers knew and have known that these electrical wire coatings and insulation were a potential enticement to “small critters” seeking not only the warmth of vehicles but also the chew friendly insulation materials which cover the electrical wiring.

Numerous automobile manufacturers have been placed on notice of claims related to the usage of the wiring coatings and insulation that attracts the furry four-legged critters which apparently utilize the wiring as a type of “dental floss” to keep their rapidly growing fangs in check. The common result of the intrusion of rats and mice is to result in the destruction of the electrical connections of the appliance or vehicle which may result in arcing and possibly fire.

Certainly when examining a common vehicle or appliance fires, it is always important to consider the potential impact on cause from a rat, mice or vermin attack when there is supporting evidence of their presence at or near the area of origin. Ruling this in or out also becomes important if it is determined that the wiring was “spiced” with soy based products.

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