Liable

What follows is not legal or other professional advice. We strongly recommend you consult a qualified attorney or other expert regarding legal representation, your legal options or for interpretation of laws relating to your business.

Some of the most serious and talked about product liability cases and settlements in recent years have involved class action lawsuits filed against major manufacturers of automobiles, pharmaceuticals and medical devices. However, defective products can extend to virtually every corner of the marketplace — including the jan/san industry.

In fact, jan/san distributors are subject to being held strictly liable for defective products under certain laws and regulations that govern today’s product liability in the United States. This includes any type of bodily injury or property damage losses from a product they sell, the product’s packaging, instructions for use, labels, warnings and anything else related to the product’s use.

Liability Law

Under current law in virtually every state in the United States, an injured party can file a lawsuit against any company in the distribution chain of a product. But since there is no liability law on the federal level, many states have enacted comprehensive product liability statutes, says Fred Mendelsohn, partner with Burke, Warren, MacKay & Serritella P.C., a Chicago-based full-service law firm.

For instance, under Georgia state law, a manufacturer is held liable for any defective product, but strict liability cannot be imposed on a distributor. Thus, the Georgia statute excludes a distributor from legal responsibility.

In other states, Illinois in particular, distributors who solely move products can remove themselves from a product liability lawsuit at an early stage. And under Missouri state law, a distributor may be dismissed in a liability lawsuit if the manufacturer of the product is also named as a defendant. Similar-themed statutes also exist in states including, but not limited to, Colorado, Nebraska, South Dakota and Tennessee.

In Texas, however, state legislature requires that manufacturers defend distributors who are sued in product liability actions unless the manufacturer can prove the distributor altered the product in a manner that caused harm to the plaintiff.

As legislative tort reformers continue to question the fairness of holding a non-manufacturing distributor strictly liable for selling defective products, and because of the diversity that exists among the many different state statutes, more states have begun following the Model Uniform Products Liability Act (promulgated by the United States Department of Commerce for voluntary use) — which relieves distributors of strict liability unless the manufacturer is not subject to the court’s jurisdiction or is likely to go bankrupt.

Today, where a distributor in the U.S. can be held liable for losses, injury or damage caused by a defective product under the doctrine of strict tort liability, the injured party may file a lawsuit against a distributor, even though the distributor did not create the defect, participate in the design or production of the product, or author instructions or warnings. Quite frankly, it doesn’t even matter if a distributor may have obtained a product in a sealed box and turned around and sold it in a sealed box — the distributor is still potentially liable to the injured party based on the legal doctrines of product liability.

Product liability is complex and at times confusing. Thus, jan/san distributors need to fully understand what parts of their businesses can directly be affected.

Where Distributors Are Most Susceptible

A distributor can be held strictly liable if they modify products, which may mean modifying the warranty or instructions of the product. This includes any distributor who repackages or re-labels a product. This issue mostly arises with distributors who sell private label products.

In the jan/san distribution sector, selling private labels may be an effective business strategy for today’s supply houses. However, this business opportunity can also have some underlying legal and financial risks if not approached carefully.

With four out of 10 distributors selling some kind of a private label today according to “Facing The Forces Of Change,” it is a definite cause for concern, especially if a distributor is repackaging the products or printing its own labels or instructions in-house.

“With private labeling, you start to participate in the labeling of instructions and that potentially could put you at a higher liability risk,” says Phil Consolino, president of SouthEast Link, an Atlanta-based jan/san distributor. “You have to be very attentive when you’re doing private label packaging.”

Some distributors who used to manufacture private label brands in-house say that all the regulations, red tape and overhead has driven them to outsource their private label brands to manufacturing companies, who in turn develop the product from top to bottom. Most of these manufacturers are also going out of their way to protect distributors by naming them as additional insurers on their liability insurance, says Fritz Gast, president of P.B. Gast & Sons, Grand Rapids, Mich.

“What they’re doing for us is they’re manufacturing it, they’re bottling it, but they’re putting our label on it,” he says. “Anything we buy with our name on it from our manufacturer, we go back to that manufacturer and say we would like to be named as an additional insurer on these products and typically they abide by that.”

For instance, if a distributor sold a customer a private label floor chemical and someone was injured by a slip-and-fall accident, the manufacturer would step in to protect the distributor if it was named in a suit.

However, distributors must be aware that sometimes manufacturers fail to follow through with the commitment to add a distributor as an additional insured — sometimes purposely, others times inadvertently.

Another potential liability setback for distributors is if a distributor is purchasing private label products from overseas. Normally, a distributor named in a product liability lawsuit in the United States can bring the manufacturer of the defective product into the case as a defendant if the plaintiff has not done so. At that time a distributor can — and oftentimes do — claim indemnity from the manufacturer as the faulty party.

However, if the product is produced by a foreign supplier, this approach by a distributor may not always be successful. That’s because when a manufacturer is offshore without any operations in the U.S., it may not be subject to a lawsuit in the United States. The same result applies to bankrupt U.S. manufacturers as well, as a bankrupt company is all but invulnerable to lawsuits.

So, if the foreign manufacturer or bankrupt U.S. manufacturer cannot be served with lawsuit papers, the plaintiff in the case will then focus the claims against the viable party — the distributor.

When design and manufacturing is done by an offshore manufacturer, distributors have a hard time defending against defective design. A plaintiffs will often argue that the private labeler — the distributor — is an apparent manufacturer and therefore responsible for the product design and manufacturing, and also for the warnings and package instructions. When a plaintiff makes this type of claim, the actual manufacturer, whether based in the U.S. or offshore, may refuse to take over the defense of the private-label distributor, arguing that the plaintiff is making a claim at the private label itself, not just the product design.

One way for a private label distributor to offset the risk of product liability is to include an enforceable indemnification-and-defense provision in a contract with the private label manufacturer. This allows the distributor to turn over the case to the manufacturer as soon as it’s filed and the distributor can then let the manufacturer provide the legal action needed to protect the distributor.

Service And Repair

A distributor may also be held liable, or at least increase their exposure to the possibility of being held liable, if they are servicing or repairing products. And with floor machines being a booming market in the jan/san industry, most distributors in one form or another offer some sort of in-house repair or service for machinery. It is an area that is extremely critical to make sure that distributors have policies in place.

“Once you get involved with touching that equipment, modifying it, repairing it, if someone gets a serious shock or something because you didn’t do the proper diagnostics, you are definitely exposing yourself,” says Consolino. “For example, if somebody walks in and says I need you to change the brush or change the cord and you don’t do proper diagnostics on the machine, and you make a change at the customer’s request and then there’s some sort of reaction to that, you’re going to be brought into that case because you modified it, you did something to that machine.”

It’s also an area where distributors have to be very attentive. Consolino advises distributors perform full diagnostic checks on every machine no matter the reason it needs servicing.

“And if the customer does not want that, hand them the machine back and say, ‘Sorry, we’re not going to do a quick little fix here,’” he says.

Although almost all machine manufacturers provide one level or another of training, the jan/san industry does not have any independent certification for distributors’ equipment service technicians. So, distributors are more likely to expose themselves to the possibility of product liability suits for improper repairs or service from customers.

However, distributors can mitigate their liability exposure by sending their technicians to independent training courses that focus primarily on certain aspects of machine repair such as electrical certification.

“Look for an independent electrical certification course at your community college or somewhere because really the worst risk for equipment is electrical and if service technicians clearly understand how to read a letter diagram, understand schematics, do diagnostics properly, you dramatically minimize your exposure to liability,” says Consolino. “So, until there’s something specific industry-wise, there are courses and things out there to do.”

Minimizing Liability Exposure

Getting slapped with a product liability lawsuit can be painful for jan/san distributors — especially if they’re forced to pay substantial damages. Thus, it is important to have the proper backing before a lawsuit is presented.

One way to ensure a distributor’s assets can remain in good standing order is by investing in liability insurance. Liability insurance helps a distributor protect itself by covering the product it sells.

Insurance companies will for the most part keep distributors up to date on liability laws in their state and ask questions that relate to potential liability risk, says a Wis.-based distributor who asked to remain nameless.

It is also prudent for distributors to cover their bases and deal with manufacturers that have their own adequate product liability coverage. A distributor may ask the manufacturer to supply a certificate of insurance, which is a document issued by the manufacturer’s insurance company that describes the extent of coverage and the policy term. It is also important that a distributor ask to be added as an additional insured on the manufacturer’s product liability policy.

Distributors are also best suited to hire an attorney who is familiar with their business or line of work.

“I would suggest having a meeting with whoever you use to make sure their firm is adequately prepared to defend you,’ says Consolino. “If not, make sure you’re connected with somebody who is just in case. Because one of the problems is if you have legal council that doesn’t know anything about your company, you have to go through all of that orientation before they can even begin to defend you.”

Additionally, an attorney will be able to assess a distributor’s potential exposures from products sold and services provided in their state or states they service. Guidance from an attorney can also be beneficial in developing a risk management strategy or an in-house risk management team that oversees potential liability exposure and makes sure the company exercises due diligence in making themselves aware of any known product defects in the products they distribute.

“If you’re just reselling, you have to make sure you are aware of potential risks or defects that the product might have that could cause injury,” says Mendelsohn. “Because you could get picked off under that certain instance for failing to warn or for knowing about something and not taking the steps to prevent it.”

Lastly, distributors are best served by doing business with reputable manufacturers who will back them every step of the way.

“If a distributor partners with a reputable manufacturer then should a claim arise, the distributor could expect that manufacturer to handle the defense,” says a Fla.-based jan/san distributor who asked to remain nameless. “And that’s the benefit of choosing your manufacturer partners carefully rather than choosing a company that you don’t really know who they are. If you work with good manufacturer, then typically they’re going to handle all of the defense and litigation. Pick and choose your manufacturer partners very carefully. If you do that, then hopefully you won’t have any worries.”