A Primer for Successor Corporations on Avoiding Potential Product Liability Exposure

The first part of this article discussed traditional criteria for successor liability and the expanded theory of successor liability provided by the continuity of enterprise exception. The conclusion continues the discussion of expanded successor liability law pursuant to the product line exception.

Product Line Exception

The “product line” exception, originally created by the California Supreme Court in Ray v. Alad Corporation 19 Cal. 3d 22, 30 (1977), holds that even in connection with an asset sale, “a party which acquires a manufacturing business and continues the output of its line of products … assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired.” This exception has been relied upon in some jurisdictions to hold a successor corporation liable where it continues to produce a product line of the seller that caused the liability. Courts applying the product line exception will hold a successor liable where: 1) there has been a destruction of the plaintiff's available remedies because of the predecessor's sale and/or subsequent dissolution; 2) the purchaser is able to assume the original manufacturer's risk-spreading role through adjusting prices of the products in question; and 3) the purchaser enjoys the corporate goodwill of the predecessor associated with the product in question, thereby making it fair for the purchaser to assume the corresponding liabilities.

Application of the product line exception has the potential to cause a significant and unsettling expansion of successor product liability. The product line exception is particularly troubling because the key factor triggering liability ' the predecessor's inability to satisfy plaintiffs ' is not within a successor's control. For example, in New Jersey, the product line exception has been applied in circumstances where the predecessor's dissolution occurred decades before the transaction at issue, creating the potential that a business may be left to toil in a state of potential exposure for periods far in excess of what could have possibly been anticipated at the time of the transaction.

Status of the Product Line Exception

California, Connecticut, Georgia, New Jersey, New Mexico, Pennsylvania, and Washington have adopted the product line exception. The majority of jurisdictions, however, have declined to adopt the product line exception. An Indiana court, in rejecting this exception, stated “[s]trict liability should not be imposed because: the successor did not create the risk, nor did it directly profit from the predecessor's sale of the defective product; it did not solicit the use of the defective product nor make any representations as to its safety; and it is not able to enhance the safety of a product that is already on the market.”

However, the product line exception was applied by a California court where the predecessor sold but did not manufacture the product that was the subject of the lawsuit. It has been held not to apply, however, in at least one case where the successor corporation did not continue to manufacture or distribute the allegedly defective product. In that case, a Pennsylvania court opined that the product line is inapplicable where the successor never promoted nor marketed the product, and was not even in existence when the predecessor marketed the product. That rule of non-application has been applied even when a successor corporation carried on the general business of its predecessor because it was deemed inequitable to require consumers of wholly unrelated products to pay a premium for injuries caused by a specific product no longer produced.

Avoiding Application of the Product Line Exception

The most effective way for a purchasing corporation to protect itself from potential successor liability through the product line exception is through a carefully drafted purchase agreement. As with the continuity of enterprise exception, the purchase agreement should contain a provision stating that the seller corporation not dissolve for some specified period of time so that a plaintiff's potential remedies are not eliminated. Additionally, an indemnification provision specifying that the selling corporation will indemnify the purchasing corporation for any liability associated with any product manufactured prior to the transaction is also helpful in avoiding the application of this rather oppressive theory.

Conclusion

The law surrounding successor liability is unsettled. A thorough, analytical and expert evaluation of a product's liability concerns is critical to gaining an appreciation of both the macro and micro issues inherent in avoiding the pitfalls that may ensnare an unsuspecting party. An attorney with expertise in successor liability and piercing the corporate veil in the product liability arena can analyze the substantive facts and nuances of the subject company's potential liabilities, past, present and future. It is essential to recognize potential product liability claims and understand the intricacies surrounding the law in order to protect against the unpredictability and expansive nature of successor liability through the use of preventative measures.

The first part of this article discussed traditional criteria for successor liability and the expanded theory of successor liability provided by the continuity of enterprise exception. The conclusion continues the discussion of expanded successor liability law pursuant to the product line exception.

Product Line Exception

The “product line” exception, originally created by the California Supreme Court in Ray v. Alad Corporation 19 Cal. 3d 22, 30 (1977), holds that even in connection with an asset sale, “a party which acquires a manufacturing business and continues the output of its line of products … assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired.” This exception has been relied upon in some jurisdictions to hold a successor corporation liable where it continues to produce a product line of the seller that caused the liability. Courts applying the product line exception will hold a successor liable where: 1) there has been a destruction of the plaintiff's available remedies because of the predecessor's sale and/or subsequent dissolution; 2) the purchaser is able to assume the original manufacturer's risk-spreading role through adjusting prices of the products in question; and 3) the purchaser enjoys the corporate goodwill of the predecessor associated with the product in question, thereby making it fair for the purchaser to assume the corresponding liabilities.

Application of the product line exception has the potential to cause a significant and unsettling expansion of successor product liability. The product line exception is particularly troubling because the key factor triggering liability ' the predecessor's inability to satisfy plaintiffs ' is not within a successor's control. For example, in New Jersey, the product line exception has been applied in circumstances where the predecessor's dissolution occurred decades before the transaction at issue, creating the potential that a business may be left to toil in a state of potential exposure for periods far in excess of what could have possibly been anticipated at the time of the transaction.

Status of the Product Line Exception

California, Connecticut, Georgia, New Jersey, New Mexico, Pennsylvania, and Washington have adopted the product line exception. The majority of jurisdictions, however, have declined to adopt the product line exception. An Indiana court, in rejecting this exception, stated “[s]trict liability should not be imposed because: the successor did not create the risk, nor did it directly profit from the predecessor's sale of the defective product; it did not solicit the use of the defective product nor make any representations as to its safety; and it is not able to enhance the safety of a product that is already on the market.”

However, the product line exception was applied by a California court where the predecessor sold but did not manufacture the product that was the subject of the lawsuit. It has been held not to apply, however, in at least one case where the successor corporation did not continue to manufacture or distribute the allegedly defective product. In that case, a Pennsylvania court opined that the product line is inapplicable where the successor never promoted nor marketed the product, and was not even in existence when the predecessor marketed the product. That rule of non-application has been applied even when a successor corporation carried on the general business of its predecessor because it was deemed inequitable to require consumers of wholly unrelated products to pay a premium for injuries caused by a specific product no longer produced.

Avoiding Application of the Product Line Exception

The most effective way for a purchasing corporation to protect itself from potential successor liability through the product line exception is through a carefully drafted purchase agreement. As with the continuity of enterprise exception, the purchase agreement should contain a provision stating that the seller corporation not dissolve for some specified period of time so that a plaintiff's potential remedies are not eliminated. Additionally, an indemnification provision specifying that the selling corporation will indemnify the purchasing corporation for any liability associated with any product manufactured prior to the transaction is also helpful in avoiding the application of this rather oppressive theory.

Conclusion

The law surrounding successor liability is unsettled. A thorough, analytical and expert evaluation of a product's liability concerns is critical to gaining an appreciation of both the macro and micro issues inherent in avoiding the pitfalls that may ensnare an unsuspecting party. An attorney with expertise in successor liability and piercing the corporate veil in the product liability arena can analyze the substantive facts and nuances of the subject company's potential liabilities, past, present and future. It is essential to recognize potential product liability claims and understand the intricacies surrounding the law in order to protect against the unpredictability and expansive nature of successor liability through the use of preventative measures.