Tendering Claims to Manufacturers, Suppliers

Done properly, a tender is a hammer. It is a demand for indemnity made by an initial defendant (typically, but not necessarily, a distributor or retailer) to another entity upstream in the distribution chain. Depending on the jurisdiction, defense and indemnity in product liability cases can be sought on the basis of common law indemnity, statutory indemnity, contractual indemnity, or through vendor's endorsements in insurance policies. The particulars of these forms 'of indemnity are beyond the scope of this article but can be reviewedin detail in several recent articles. See James Lockhart, Cause Of Action To Obtain Indemnity From Manufacturer Or Supplier For Injury Or Loss Caused By Defective Product, 8 Cause of Action 2d 507 (2005); Robert A. Sachs, Product Liability Reform and Seller Liability: A Proposal for Change, 55 Baylor L. Rev. 1031 (2003); Debra T. Landis, Product Liability: Seller's Right To Indemnity From Manufacturer, 79 A.L.R. 4th 278 (1990). Tenders can start the clock in recovering attorneys' fees for every day the tender is not accepted. Tenders can pressure non-parties into taking over the defense or else risk becoming a named party to the case. Tenders can put non-parties on notice that they cannot re-litigate any question of fact determined in the original litigation if they refuse the tender. Tenders are simply in the best interests of a product defendant who did not 'cause' the alleged defect and whose involvement is only in the distribution chain.

Before drafting a tender letter, a lawyer must first determine if the case is appropriate for tender. In order to determine if a case can be tendered, a lawyer should first ask what type of defect claim is involved. An initial product claim usually falls into at least one of three (and typically all) possible types: a design defect; a manufacturing defect; or a defective warning. Product liability complaints rarely have abundant or specific information concerning the product and the alleged defect. This is complicated further by the fact that some jurisdictions allow indeterminate defect theories where the plaintiff can simply allege the product was defective and is not required to explain how or why the defect caused injury. This lack of specificity matters little to the plaintiff but is hugely significant to the defending parties in the distribution chain because all are potentially liable for an unknown defect. Sometimes you will not learn what defect theory plaintiffs will pursue until they call their first witness; however, you can still prepare for a tender.

To address the unknown or indeterminate defect case, naturally you should try to get information such as the name of the product, model number, date code, the country 'made in,' date of purchase, point of purchase, and anything else to narrow the universe of this product informally from plaintiff's counsel so that you can tender as early as possible. If possible, schedule a product inspection so that your client can verify product details to set up a tender letter. All of this will help determine where in the distribution chain your client fits. Did the manufacturer assemble the product at its factory but use component parts supplied by another company? Did it sell the product to a retailer and draft the user's manual or warnings but have nothing to do with the design or manufacture? Did it suggest how the product should be made and have a factory in China build it?

Before tendering, you must determine what role (if any) your client had in the product's design, manufacture, or warnings. If it appears that the injury-causing defect could have been from another party higher up in the distribution chain, identify that party and draft your tender letter. To the right is a sample tender letter to a manufacturer or supplier that is not a named defendant in the case but is believed to be either the manufacturer or supplier of the defective product or component part.

What a Tender Accomplishes

This sample tender letter accomplishes several things. First, it complies with the notice requirement set forth in '2-607(5)(a) of the Uniform Commercial Code, which requires prompt notice of the claim that the potential indemnitor could be bound by a finding that the product was defective in the underlying case if it fails to accept the tender. This is commonly referred to as the 'vouching in' process. Simply put, a defendant buyer of a defective product or component part has the right to vouch in its supplier under UCC '2-607(5). Thus, even if the manufacturer or supplier has not been formally joined in the case, the judgment rendered in the case may be binding against the manufacturer or supplier if you have properly vouched it in by giving proper notice. Additionally, even if the manufacturer or supplier is already a named defendant in the case and you have filed a cross-claim against it, a tender letter is still technically required to give adequate notice under the UCC and most state indemnity laws.

Second, the tender letter puts the potential indemnitor on notice that if the product defect was caused by its actions, it may be responsible, not only for the amount the indemnitee was required to pay in damages or settlement in the underlying action, but also for attorneys' fees in defense of the action. Attorneys' fees may be recoverable under certain state statutes even if there is not an express indemnity contract between the parties (which, of course, is contrary to the so-called 'American Rule' that each party is responsible for its own attorneys' fees). See e.g., Ariz. Rev. Stat. '12-684(A): 'In any product liability action where the manufacturer refuses to accept a tender of defense from the seller, the manufacturer shall indemnify the seller for any judgment rendered against the seller and shall also reimburse the seller for reasonable attorneys' fees and costs incurred by the seller in defending such action … ' (emphasis added) See also, Tex. Civ. Prac. & Rem. Code Ann. '82.002: 'A seller is entitled to recover from the manufacturer court costs and other reasonable expenses, reasonable attorney fees, and any reasonable damages incurred by the seller to enforce the seller's right to indemnification under this section.' (emphasis added) For a comprehensive discussion on the ability to recover attorneys' fees in products cases, see Thomas R. Malia, Attorneys' Fees In Product Liability Suits, 53 A.L.R. 4th 414 (1988).

Third, the tender letter puts pressure on the potential indemnitor to accept the tender, and remain behind the scenes, or else face a third-party complaint making it a formal party in the case. Enclosing a draft of a third-party complaint with a tender letter shows that your client is serious about bringing the indemnitor into the case. Many times manufacturers and suppliers would prefer to resolve the case without being a named party because doing so can reduce their exposure and visibility. The third-party complaint should contain not only a claim for indemnity, but also a claim for contribution. Contribution and indemnity are alternative remedies but are frequently sought in the same action. 8 Cause of Action 2d 507, '3, citing Restatement (Second) Torts '886B Comment 1. Typically, 'contribution requires the parties to share the burden, whereas indemnity requires one party to reimburse the other entirely.' Id. Thus, even if your client had some role in the design, manufacture, or warnings, the indemnitor may have contributed to the alleged defect causing injury and should share in the loss.

The Vendor's Endorsement

A brief discussion of the vendor's endorsement is appropriate because most product liability cases should involve an investigation of these creatures. Product liability insurance policies often insure not only the manufacturer of the product, but also extend coverage to a purchaser of the insured's product by a 'vendor's endorsement' to the policy. One purpose of a vendor's endorsement is to encourage buyers to buy products with the assurance that if the product causes injury, the seller's insurer will pick up the defense. By way of illustration from the sample tender letter, Acme's insurance policy may contain a provision naming Distributors, Inc. as an additional insured for injuries arising out of a defect in Acme's product. Manufacturers and suppliers frequently provide buyers with certificates of insurance, which are merely representations that the seller has obtained coverage for the buyer under its insurance policy. You should always ask your client to search its records for any certificates of insurance it may have received. It is not uncommon, however, for buyers to be completely unaware that such policies exist. Therefore, it is sometimes appropriate to request a copy of the manufacturer's insurance policy to determine if a vendor's endorsement exists. Generally, however, the insurer's duty to defend is not triggered until the insurer gets actual notice of the lawsuit. Thus, you cannot rely on the fact that you have sent a tender letter to the manufacturer as giving notice to its insurer. A separate letter directly to the insurer is typically needed to put the insurer on notice to provide a defense.

Acceptance of a Tender Letter

Tender letters do not always work. Often they do not work because there are too many issues making acceptance of the tender too risky for the manufacturer or supplier. A tender could be rejected because you have given too little information about the product or component, or simply given the wrong information. You might have tendered to a foreign manufacturer or supplier that is confident personal jurisdiction can be avoided. The manufacturer or supplier may make a business decision to deny your tender and take a 'wait and see' approach. On the other hand, a manufacturer or supplier may be inclined to accept the tender under certain conditions. To the right is a sample acceptance of tender letter by a manufacturer or supplier that is not a named defendant in the case using the previously discussed Acme, Inc. and Distributors, Inc.

This sample acceptance of a tender letter protects Acme's rights if it later determines that Distributors is responsible for the defect that caused injury. Say, for example, that the plaintiff alleges the underwater electric grill contained a design defect, manufacturing defect, and warnings defect. Acme concedes that it designed and manufactured the grill, and the plaintiff's injury is consistent with either a design or manufacturing defect, making its acceptance of the tender reasonable. After extensive discovery, Acme successfully bars the plaintiff's expert from testifying under a Daubert challenge. To save her case, the plaintiff shifts gears and focuses on a particular warning in the user's manual that was drafted by Distributors. Under this scenario, Acme might redirect tender of the defense back to Distributors because the defective warning was not drafted by Acme. Even if it seems highly unlikely that such a redirection could occur, it is usually the best practice to accept a tender with a reservation of rights.

Conclusion

Tender letters are designed to eliminate buyers of defective products or components from the litigation early. Even if the tender is not accepted unconditionally, the tender should position the buyer into successfully recovering damages it paid and/or defense costs it incurred in the underlying case. Although there are many reasons that a tender might be unsuccessful, the relatively low expense is usually justified compared with the potential benefit (i.e., that another participant in the distribution chain will assume the defense).

Brian W. Fields is a partner in the Kansas City office of Sonnenschein Nath & Rosenthal LLP and specializes in product liability cases and other complex litigation. He has a nationwide product litigation practice serving as national and regional counsel for a number of product manufacturers and distributors. Phone: 816-460-2542.

The birth of modern-day product liability law was arguably delivered in 1963 by the California Supreme Court in Greenman v. Yuba Power Products , 59 Cal. 2d 57 (1963). Today, product liability law is commonly understood to mean that all participants in the chain of distribution of a defective product are strictly liable for injuries caused by that product. Strict liability generally means that any seller in the distribution chain is liable if the product is defective, even if the seller was not responsible for making that product defective. There are a variety of different sellers in today's global economy that partially or completely assemble or manufacture their products and can be held responsible for defects even if not sued in the original action. Sellers in the distribution chain are vast and include manufacturers, suppliers, distributors, wholesalers, and retailers. Those lower in the distribution chain (i.e., those closer to the ultimate purchaser of the product) often seek defense and indemnity from upstream participants.

Products are ubiquitous. Mountains of paper have been written on a variety of issues unique to products cases since the Greenman decision. There appear to be few articles written, however, on the strategies for effectively tendering the defense and indemnity of products cases upstream to the manufacturer or supplier of the product. Tendering is a key component to almost any products case. This article discusses some practical considerations for making an effective tender and provides a sample tender letter.

What Is a Tender?

Done properly, a tender is a hammer. It is a demand for indemnity made by an initial defendant (typically, but not necessarily, a distributor or retailer) to another entity upstream in the distribution chain. Depending on the jurisdiction, defense and indemnity in product liability cases can be sought on the basis of common law indemnity, statutory indemnity, contractual indemnity, or through vendor's endorsements in insurance policies. The particulars of these forms 'of indemnity are beyond the scope of this article but can be reviewedin detail in several recent articles. See James Lockhart, Cause Of Action To Obtain Indemnity From Manufacturer Or Supplier For Injury Or Loss Caused By Defective Product, 8 Cause of Action 2d 507 (2005); Robert A. Sachs, Product Liability Reform and Seller Liability: A Proposal for Change, 55 Baylor L. Rev. 1031 (2003); Debra T. Landis, Product Liability: Seller's Right To Indemnity From Manufacturer, 79 A.L.R. 4th 278 (1990). Tenders can start the clock in recovering attorneys' fees for every day the tender is not accepted. Tenders can pressure non-parties into taking over the defense or else risk becoming a named party to the case. Tenders can put non-parties on notice that they cannot re-litigate any question of fact determined in the original litigation if they refuse the tender. Tenders are simply in the best interests of a product defendant who did not 'cause' the alleged defect and whose involvement is only in the distribution chain.

Before drafting a tender letter, a lawyer must first determine if the case is appropriate for tender. In order to determine if a case can be tendered, a lawyer should first ask what type of defect claim is involved. An initial product claim usually falls into at least one of three (and typically all) possible types: a design defect; a manufacturing defect; or a defective warning. Product liability complaints rarely have abundant or specific information concerning the product and the alleged defect. This is complicated further by the fact that some jurisdictions allow indeterminate defect theories where the plaintiff can simply allege the product was defective and is not required to explain how or why the defect caused injury. This lack of specificity matters little to the plaintiff but is hugely significant to the defending parties in the distribution chain because all are potentially liable for an unknown defect. Sometimes you will not learn what defect theory plaintiffs will pursue until they call their first witness; however, you can still prepare for a tender.

To address the unknown or indeterminate defect case, naturally you should try to get information such as the name of the product, model number, date code, the country 'made in,' date of purchase, point of purchase, and anything else to narrow the universe of this product informally from plaintiff's counsel so that you can tender as early as possible. If possible, schedule a product inspection so that your client can verify product details to set up a tender letter. All of this will help determine where in the distribution chain your client fits. Did the manufacturer assemble the product at its factory but use component parts supplied by another company? Did it sell the product to a retailer and draft the user's manual or warnings but have nothing to do with the design or manufacture? Did it suggest how the product should be made and have a factory in China build it?

Before tendering, you must determine what role (if any) your client had in the product's design, manufacture, or warnings. If it appears that the injury-causing defect could have been from another party higher up in the distribution chain, identify that party and draft your tender letter. To the right is a sample tender letter to a manufacturer or supplier that is not a named defendant in the case but is believed to be either the manufacturer or supplier of the defective product or component part.

What a Tender Accomplishes

This sample tender letter accomplishes several things. First, it complies with the notice requirement set forth in '2-607(5)(a) of the Uniform Commercial Code, which requires prompt notice of the claim that the potential indemnitor could be bound by a finding that the product was defective in the underlying case if it fails to accept the tender. This is commonly referred to as the 'vouching in' process. Simply put, a defendant buyer of a defective product or component part has the right to vouch in its supplier under UCC '2-607(5). Thus, even if the manufacturer or supplier has not been formally joined in the case, the judgment rendered in the case may be binding against the manufacturer or supplier if you have properly vouched it in by giving proper notice. Additionally, even if the manufacturer or supplier is already a named defendant in the case and you have filed a cross-claim against it, a tender letter is still technically required to give adequate notice under the UCC and most state indemnity laws.

Second, the tender letter puts the potential indemnitor on notice that if the product defect was caused by its actions, it may be responsible, not only for the amount the indemnitee was required to pay in damages or settlement in the underlying action, but also for attorneys' fees in defense of the action. Attorneys' fees may be recoverable under certain state statutes even if there is not an express indemnity contract between the parties (which, of course, is contrary to the so-called 'American Rule' that each party is responsible for its own attorneys' fees). See e.g., Ariz. Rev. Stat. '12-684(A): 'In any product liability action where the manufacturer refuses to accept a tender of defense from the seller, the manufacturer shall indemnify the seller for any judgment rendered against the seller and shall also reimburse the seller for reasonable attorneys' fees and costs incurred by the seller in defending such action … ' (emphasis added) See also, Tex. Civ. Prac. & Rem. Code Ann. '82.002: 'A seller is entitled to recover from the manufacturer court costs and other reasonable expenses, reasonable attorney fees, and any reasonable damages incurred by the seller to enforce the seller's right to indemnification under this section.' (emphasis added) For a comprehensive discussion on the ability to recover attorneys' fees in products cases, see Thomas R. Malia, Attorneys' Fees In Product Liability Suits, 53 A.L.R. 4th 414 (1988).

Third, the tender letter puts pressure on the potential indemnitor to accept the tender, and remain behind the scenes, or else face a third-party complaint making it a formal party in the case. Enclosing a draft of a third-party complaint with a tender letter shows that your client is serious about bringing the indemnitor into the case. Many times manufacturers and suppliers would prefer to resolve the case without being a named party because doing so can reduce their exposure and visibility. The third-party complaint should contain not only a claim for indemnity, but also a claim for contribution. Contribution and indemnity are alternative remedies but are frequently sought in the same action. 8 Cause of Action 2d 507, '3, citing Restatement (Second) Torts '886B Comment 1. Typically, 'contribution requires the parties to share the burden, whereas indemnity requires one party to reimburse the other entirely.' Id. Thus, even if your client had some role in the design, manufacture, or warnings, the indemnitor may have contributed to the alleged defect causing injury and should share in the loss.

The Vendor's Endorsement

A brief discussion of the vendor's endorsement is appropriate because most product liability cases should involve an investigation of these creatures. Product liability insurance policies often insure not only the manufacturer of the product, but also extend coverage to a purchaser of the insured's product by a 'vendor's endorsement' to the policy. One purpose of a vendor's endorsement is to encourage buyers to buy products with the assurance that if the product causes injury, the seller's insurer will pick up the defense. By way of illustration from the sample tender letter, Acme's insurance policy may contain a provision naming Distributors, Inc. as an additional insured for injuries arising out of a defect in Acme's product. Manufacturers and suppliers frequently provide buyers with certificates of insurance, which are merely representations that the seller has obtained coverage for the buyer under its insurance policy. You should always ask your client to search its records for any certificates of insurance it may have received. It is not uncommon, however, for buyers to be completely unaware that such policies exist. Therefore, it is sometimes appropriate to request a copy of the manufacturer's insurance policy to determine if a vendor's endorsement exists. Generally, however, the insurer's duty to defend is not triggered until the insurer gets actual notice of the lawsuit. Thus, you cannot rely on the fact that you have sent a tender letter to the manufacturer as giving notice to its insurer. A separate letter directly to the insurer is typically needed to put the insurer on notice to provide a defense.

Acceptance of a Tender Letter

Tender letters do not always work. Often they do not work because there are too many issues making acceptance of the tender too risky for the manufacturer or supplier. A tender could be rejected because you have given too little information about the product or component, or simply given the wrong information. You might have tendered to a foreign manufacturer or supplier that is confident personal jurisdiction can be avoided. The manufacturer or supplier may make a business decision to deny your tender and take a 'wait and see' approach. On the other hand, a manufacturer or supplier may be inclined to accept the tender under certain conditions. To the right is a sample acceptance of tender letter by a manufacturer or supplier that is not a named defendant in the case using the previously discussed Acme, Inc. and Distributors, Inc.

This sample acceptance of a tender letter protects Acme's rights if it later determines that Distributors is responsible for the defect that caused injury. Say, for example, that the plaintiff alleges the underwater electric grill contained a design defect, manufacturing defect, and warnings defect. Acme concedes that it designed and manufactured the grill, and the plaintiff's injury is consistent with either a design or manufacturing defect, making its acceptance of the tender reasonable. After extensive discovery, Acme successfully bars the plaintiff's expert from testifying under a Daubert challenge. To save her case, the plaintiff shifts gears and focuses on a particular warning in the user's manual that was drafted by Distributors. Under this scenario, Acme might redirect tender of the defense back to Distributors because the defective warning was not drafted by Acme. Even if it seems highly unlikely that such a redirection could occur, it is usually the best practice to accept a tender with a reservation of rights.

Conclusion

Tender letters are designed to eliminate buyers of defective products or components from the litigation early. Even if the tender is not accepted unconditionally, the tender should position the buyer into successfully recovering damages it paid and/or defense costs it incurred in the underlying case. Although there are many reasons that a tender might be unsuccessful, the relatively low expense is usually justified compared with the potential benefit (i.e., that another participant in the distribution chain will assume the defense).

Brian W. Fields is a partner in the Kansas City office of Sonnenschein Nath & Rosenthal LLP and specializes in product liability cases and other complex litigation. He has a nationwide product litigation practice serving as national and regional counsel for a number of product manufacturers and distributors. Phone: 816-460-2542.