More distributors have been hit with product liability lawsuits. If pursuing a private label, distributors must educate themselves on all possible risks associated with taking on a manufacturing role. Distributors and their customers must also be aware of the risk of counterfeits in the supply chain, another potential source of liability claims.
Nearly 250,000 circuit breakers can fit into one shipping container. Look at how many possible homes these circuit breakers infiltrate and how many lives and properties can be damaged if the circuit breakers are defective or not installed properly,”says Bernie Heinze, attorney and president/CEO of Sequent Insurance Group, Philadelphia, PA.
“And that is just one container. The amount of product that is coming into the U.S. from offshore is increasing as distributors and retailers look for ways to gain market share and increase profit margin.”
The question, however, is: “To what end and at what cost?”If something does go wrong with a product or a counterfeit makes its way into an end-user’s hands, it’s impossible to avoid being sued. “Anytime someone gets injured, they have the right to go to a state or federal court and file a lawsuit so they can be compensated for their losses,”Heinze says.
The face of product liability is changing as the market evolves, and traditional sources of supply are challenged. Counterfeits have entered the supply chain, and more resellers are getting involved with private label products through their own operations overseas or even domestically. In addition, many distributors have taken on responsibility for installations, another area where something could go wrong.
In recent years, the industry has seen a general increase in product liability cases, though there is no sure way to tie that directly to the reported increase in private-label production or the growing problem of counterfeits, Heinze says. Still, the fact remains that anyone in the supply chain, and not just the original manufacturer, can be held liable for injuries or damage resulting from defective product.
If end-users, such as contractors, buy counterfeits even unknowingly from a “cheaper”source, they may be held liable if that product does not perform or causes injury or death. If a distributor unknowingly sold that product to them, they can also be held liable.
On the private-label side, distributors must be educated on all possible risks associated with taking on a manufacturing role, and they should take a proactive stance to mitigate those risks.
“If the court that is involved with a case cannot get a hold of the manufacturer, the distributor stands in the manufacturer’s shoes,”explains John Selldorff, CEO of electrical manufacturer Legrand/North America. “If you can’t get that manufacturer to back you up, then you’re on the hook.”
Case Study: Distributor holds seminar to inform customers on the risks
Counterfeit product, of course, is not the same as private label. But in both cases, the product, legit or otherwise, is increasingly being produced overseas in China and other lower-cost countries.
With private label, which includes products manufactured for a distributor under contract or more traditional branded products acquired by a distribution company, a distributor is taking on liability that before was in the hands of the manufacturer. If an off-shore manufacturer or broker cannot be reached by a court’s jurisdiction, or no longer holds insurance to cover a reseller’s liability, the reseller in court takes full responsibility, Heinze says. Private-label sellers also face a higher risk infringing upon patents, trademark or other intellectual property protections.
More than half of wholesalers with private label currently source product from an overseasis not subject to the jurisdiction of the U.S. -when they don’t have an office here or do not have adequate insurance limits of liability to protect the distributor -it is a fact of life in today’s channel that a distributor may well have to stand in the shoes of a manufacturer, whether it’s a consumer product, electrical or otherwise.”
The risk of a product liability action goes beyond electrical goods to drugs, toys and other products. Medical devices, including shunts and stints, fail. Surprisingly, even liquor has been the target of lawsuits. (“Oftentimes people sue because they believe that the liquor has gotten them inebriated to such a point that they did bad things, so they want to sue the maker of that liquor,”Heinze explains.)
Industrial machinery is another area of concern, for example sharp edges or improper installations. Close to 60 percent of product litigation cases Heinze sees are in the industrial arena. Construction defects are also a growing target in the courts.
“When building materials started coming down in price, a lot of manufacturers and builders who weren’t necessarily the best started offering their wares and services to people all around the country, and with the lack of skilled labor, it was not necessarily built the way it should have been,” he says. “That resulted in a lot of claims and lawsuits.”
Fein says in “Facing the Forces”that product liability may limit distributors’willingness to enter certain product areas in private label -for example less likely to do power tools, but more likely to go into areas such as plumbing fixtures and fittings.
Instead of focusing on how to avoid legal battles, distributors should focus on implementing due diligence to lighten the impact of any legal problem or to reduce the likelihood problems appear in the first place.
United Stationers CEO Dick Gochnauer told MDM recently that distributors should not go down the road of private label “lightly”and when they do, to take steps to protect themselves. He said that at United Stationers’office in Asia, a large percentage of the staff is in quality assurance: “In manufacturing plants, you have to monitor very closely because you’re putting your name on the product.”
Andrew Berlin, president of Berlin Packaging, says that even with the advent of the Internet, “nothing beats walking the factory floors and doing the audits and meeting the principals of these organizations (overseas). There’s no shortcut for the hard work that goes into finding these factories.”
Taking this extra time to find reliable factories mitigates some of your risk.
Here are a few items to mitigate risk, according to Heinze, though this is just a drop in the bucket. Consult with your attorney before making a move on private label or if you want to analyze your current sourcing practices:
Do business only with an established and reputable manufacturer or intermediary.
Evaluate potential exposure from products sold and services provided in the regions and states in which you do business.
Examine contracts and strength of agreements and vendor/insured endorsements with manufacturers, distributors and others in the supply chain.
Find out how able and responsive the manufacturer will be in providing defense and indemnification for the sale of their products.
Ensure the manufacturer’s insurance company is financially secure. Obtain stronger insurance and umbrella insurance protections if dealing with unknown manufacturers. Some insurers won’t provide coverage if a distributor is dealing with unauthorized entities.
Establish a business continuity plan in the case of an investigation, lawsuit or claim.
Retain samples to compare against product delivered. Look at country of origin for manufacturer and shipment. Look for markings, misspelled words and logos on product. It could indicate a counterfeit.
In addition to risks associated with liability claims, distributors in private label or who knowingly or unknowingly sell counterfeits may have to take responsibility for product recalls, an expensive consequence.
According to a recent National Association of Wholesaler-Distributors legal brief (www.naw.org), when a manufacturer is in a foreign country, is in bankruptcy, out of business or “thinly capitalized,”distributors may hold the burden of the recall. Products intended for use in commercial or industrial settings may be considered consumer products and could fall under Consumer Products Safety Commission jurisdiction.
The law authorizes the commission to order a seller of a product to notify the buyers of the defect. It also requires sellers to repair the defect, replace it with a defect-free product or refund the price of that product.
Importers of motor vehicle parts and equipment face similar rules. plant, according to Pembroke Consulting’s Adam Fein, author of “Facing the Forces of Change: Lead the Way in the Supply Chain,”available through the National Association of Wholesaler-Distributors. More and more, distributors are opening offices in Asia or other low-cost regions. By 2012, Fein says, more than 80 percent of distributors currently with private labels plan to source overseas.
“This is not a pick-on-China or another country issue,”Selldorff says. “A lot of manufacturers, including ourselves, make product in China. It’s a question of whether you follow the correct level of quality control in the manufacturing. Can you really stand behind the product and how do you continue to properly invest in the product?”
As Fein asks in “Facing the Forces,”do the supply chain expenses and risks associated with private label reduce or eliminate potential savings distributors may gain from global sourcing?
Selldorff says distributors and others who source overseas must understand these risks. “The distributor takes for granted that if the product doesn’t do what the manufacturer says it will do, the manufacturer will stand behind them with insurance or replacement or coverage of damages,”he says. “What they need to understand is when they are dealing with some of these companies, there’s nothing to back them up. Then they are left backing up the product liability.”
Finding your way can be tricky, and requires extra care, he says. For example, a manufacturer may show that it has insurance coverage in the case of a liability claim. “But you have no proof that insurance is in force the day after you see that certificate,”Selldorff says. “A lot of companies will put insurance in place to secure the business and then cancel it the next day.”
Joint and Several Liability is a doctrine, which most of the U.S. states have adopted, which puts more than the manufacturer of a product at risk to be sued.
“The law does not require you to sue the manufacturer of a product defect. You can sue anyone in the chain of commerce,”Heinze says. A law adopted in 1965 says that if you are involved in the chain of commerce of a product deemed to be “ultra-hazardous,”unreasonably dangerous or defectively manufactured, you can be held not negligent but strictly liable. Strict liability eliminates any defense people may have had under a negligence concept.
Heinze offered this as an example of the doctrine:
“Let’s say you’re at a stoplight and I pull up behind you. The light turns green and I am hit from behind by a truck. I crash into you. So, you can sue me for your injuries, you can sue the truck, or you can sue all of us. Whether there is one person or 800 people, you can sue them all or you can pick your choice. The law does not require you to sue the manufacturer of a product defect. You can sue anyone in the chain of commerce.”
The only thing that must be proven in strict liability is that the product caused the injuries or damages sustained.
“Let’s say we have an off-shore manufacturer in China and we have private-sourced a product from them. Our label is on it,”Heinze offers as an example. “It comes to the U.S. and it is not made according to UL specifications or there is a defect in it and it causes an injury or a death.”The estate of the person who was injured files a lawsuit.
“We say, ‘We have this contract with the manufacturer that requires them to name us as an additional insured on their policy.’ … So you now have a lawsuit and you send off your insured endorsement and certificate of insurance to the broker and say, ‘Put them on notice. We just got sued.’They come back to you in 24 hours and tell you the policy was canceled. Then you are on your own. Now it becomes your insurance policy and your bottom line is at risk.
“In the event a manufacturer