Unmanned Aircraft Opportunities and Risks

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Unmanned Aircraft System (UAS) technology has reached critical mass. There are now very sophisticated aircraft that are easy to fly, cost less than a new television, and have the ability to record and broadcast video and other data. YouTube is full of videos showing UASs doing everything from delivering beer to recording events to videotaping real estate and natural attractions. While this may sound like a classic American success story, there is a fundamental problem: Most of this activity is illegal in the U.S., with no formal rules beyond a blanket prohibition on commercial operations. An additional challenge is predicting how existing tort laws will be applied to UASs. This article addresses both sets of issues.

Regulatory Landscape for Unmanned Aircraft Systems

The Federal Aviation Administration(FAA) has made it clear that all “commercial” UAS operations are prohibited absent special permission. This has led to the mistaken impression that if a UAS flight is made without money changing hands, then it is permitted. This is incorrect. The FAA recently clarified that when it indicated “commercial” operations are banned, it meant that UASs could be used only for “hobby or recreational” purposes. Docket No. FAA-2014-0396. Under this interpretation, a flight for any purpose other than enjoyment of flying the UAS is not allowed. Even charitable groups offering assistance with search and rescue efforts run afoul of this rule, despite the fact that the flights are performed by volunteers and no profit is made. See Texas Equusearch v. FAA, Docket No. 14-1061 (D.C. Cir. 2014).

Hobbyists can operate small UASs under a set of informal rules contained in an FAA Advisory Circular, AC 91-57. The UAS must be less than 55 pounds, operate below 400 feet within visual line of sight, and avoid interference with airports and other aircraft.

The FAA had planned to issue a Notice of Proposed Rule Making (NPRM) for small UASs by the end of 2014. Given the comment period and time to draft the final rules, it will likely be sometime in 2016 before small UAS rules are in place. That does not mean, however, that commercial operators are completely banned from the skies for the foreseeable future. For a highly select few (two, actually), the FAA has granted Certificates of Waiver or Authorization (COA) for commercial operations in extremely remote locations. Both of the COAs that were granted were for flights in the Arctic. More promising is the “Section 333 Exemption” process.

Under immense pressure to allow at least some commercial UAS operations, the FAA announced in May 2014 that it would entertain applications for commercial operations under Section 333 of the FAA Modernization and Reform Act of 2012. This provision required the Secretary of Transportation to determine, within 180 days, whether certain UASs can operate safely without waiting until formal rulemaking is completed. The FAA resurrected this provision as a means of accommodating some commercial operations, where they can be done safely.

The FAA considers UASs to be aircraft, which requires compliance with Federal Aviation Regulations applicable to pilot certification, aircraft certification, and operations. Since it is impossible or highly impractical to operate UASs in compliance with many of these regulations, Section 333 applications must set forth alternative procedures and limitations that establish an equivalent level of safety. Essentially, each applicant proposes the rules under which it will operate.

As a result, the UAS landscape for the immediate future looks something like this:

• Hobbyists operating UASs for purely recreational purposes (think model aircraft);
• A significant number of commercial operators who are operating illegally; and
• A small but growing number of commercial operators with Section 333 Exemptions or COAs.

UAS Tort Liability

As commercial manufacturers release their UAS products into the market, there are considerable opportunities, but also significant tort implications. Until formal regulations are in place (likely sometime in 2016), some commercial operators will continue to operate illegally at their own peril. In the case of an accident, those operators acting in violation of federal law face a finding that their actions constitute negligence per se, and might even face criminal charges for intentional violation of regulations, or reckless conduct.

UAS operators who proceed legally may use the Section 333 application process or in some cases, COAs. The Section 333 process is likely to yield the fastest results for commercial operators. It allows each operator to propose its own set of rules, proceed through an FAA approval process, and then operate commercially with FAA approval. The FAA will not grant Section 333 certification to applicants unless they demonstrate that the UAS, the UAS operator, and the proposed UAS operations will not pose a safety risk to other aircraft or persons on the ground.

While there are no published decisions in the United States arising out of UAS accidents, there have been a few accidents and incidents in the past few years involving UASs in the United States and abroad. One recent incident involved a near collision between a US Airways express jet and a UAS in Florida. No damage was done to the jet, but if a collision had occurred, the results could have been catastrophic.

In the event of a UAS accident, it is likely that plaintiffs will file a number of state tort law claims against UAS manufacturers, owners, and operators, seeking both compensatory and punitive damages. The most significant claims will arise from a UAS accident that causes bodily injury or significant property damage. UAS operators may also face privacy suits, and companies may face litigation if they use information (images or other data) collected by the UAS for commercial purposes. It is critical for UAS manufacturers and operators to develop a balanced plan for risk management and liability mitigation.

Eliminating or Mitigating Tort Liability

As UAS manufacturers and commercial operators prepare to launch their UAS products into the National Airspace System, the key question is whether there are strategies that can help eliminate or minimize tort liability.

While the FAA is establishing the broader regulatory framework, those operators who proceed with COAs or Section 333 applications will need to comply with the terms of their FAA-granted authority. The FAA operating authority will address operator (pilot) qualifications, UAS vehicle requirements, and operational parameters and limitations. While there are no strict requirements, the FAA likely will address UAS design, maintenance, required technology, and maximum speed/weight. It also likely will set minimum qualifications, certification, and training requirements for pilots as well as other crew members, such as observers and sensor operators. For operations, the FAA likely will address see-and-avoid/line-of-sight requirements, range, payload limitations, proximity to controlled airspace, and privacy concerns.

It is essential that manufacturers design and build their UASs in a way that the FAA will approve for commercial operations. There likely will be a significant amount of interaction between UAS manufacturers and operators to establish UAS operating and maintenance procedures. It is critical that operators strictly comply with the terms of their FAA operating authority, as well as all regulations that have not been exempted from their operating authority. Manufacturers and operators also should comply with all voluntary industry standards on technology, manufacturing, and operations. Compliance with such standards can give rise to a presumption that the operator or manufacturer acted reasonably, which would help mitigate potential tort liability. It is important to understand, however, that mere compliance with regulations, industry standards, and the relevant operating authority will not eliminate tort exposure.

Manufacturers and operators should create a record showing that they used state-of-the-art and best practices and complied with all government and industry standards. As the state of the art develops and new UAS technologies are developed, products should incorporate the new technologies, in particular in the areas of “detect and avoid,” “command and control,” and link technologies. Similarly, as the FAA establishes new standards for designing, manufacturing, and certifying new UASs to operate commercially, manufacturers and operators will need to ensure that their UASs comply with these changing FAA standards.

Specialized Defenses for Manufacturers

Certain specialized defenses also are available for UAS manufacturers, including the Contract Specification Defense, the Component Parts Defense, and the Government Contractor Defense. Manufacturers that designed their UASs in accordance with directions and specifications supplied by the purchaser, the Contract Specification Defense may be protected from liability for injuries caused by design defects in the products, unless the danger associated with the specifications is obvious.

UAS component manufacturers can also utilize the Component Parts Defense to assert immunity from suit by arguing that it was the systems integration that caused any alleged defect, not the component itself, and that the component manufacturer did not substantially participate in the system integration.

If the initial sales of the commercial UASs were to the U.S. military, UAS manufacturers can establish the “military pedigree” of the product to maximize the possibility that the Government Contractor Defense will extend to commercial sales. See Boyle v. United Techs. Corp. , 487 U.S. 500 (1988). There are cases applying the defense to commercial sales where the product had been previously reviewed, approved, and sold to the U.S. military.

Indemnities and Other Limitations on Liability

It is also important to negotiate contractual indemnities and ensure that customers and suppliers can satisfy such indemnities in the event of a lawsuit. For federal government contracts, Public Law 85-804 provides that certain federal agencies, including the Department of Defense and the Department of Homeland Security, will indemnify UAS manufacturers for losses not covered by insurance if the UAS was performing “unusually hazardous activities” at the time of the incident.

To protect products and services in the event of a terrorist attack, the U.S. SAFETY Act serves as the most potent protection designed to eliminate enterprise-threatening liability for a tort suit arising out of acts of terrorism in the U.S. or abroad. Such coverage can eliminate tort liability arising out of an act of terrorism, as well as eliminate punitive damages and cap any liability to terror insurance limits. SAFETY Act coverage is also available for UASs in developmental, testing, and evaluation stages.

Another way to limit or shift liability to a vendor or customer is to include properly prepared terms and conditions in UAS contracts, including exclusions of consequential damages ( e.g. , lost profits), limitations of liability, additional insured clauses, and indemnity provisions that shift liability to another party.

UAS Insurance

Insurance is critical to the success of the fledgling UAS industry. It is possible to extrapolate loss experience from the aviation industry and the military use of UASs, particularly the U.S. Air Force. Insurance underwriters are beginning to offer UAS insurance coverage in the U.S. and abroad. As UAS operational data and regulations develop, underwriters will be able to use that information to price UAS insurance more accurately.

Commercial UAS owners and operators should consider liability coverage for property damage, personal injury, and third party coverage, as well as data liability coverage for claims arising out of the storage or transmission of confidential information ( e.g ., unfair competition, deceptive trade practices, invasion of privacy).

In determining the type and cost of available UAS coverage, insurers will look at, among other things, the UAS specifications such as weight, range, speed, and payload. They will also consider the intended uses of the UAS, how long the make and model operated has been flying, whether it will be operating over populated areas, and operational parameters. Given the risks inherent to UASs, manufacturers and operators should obtain UAS insurance prior to manufacturing or operating a UAS, and should inquire with current insurers whether UAS coverage can be added as part of an existing policy.

The Need for an Express Preemption Regulation

While the above actions are essential to eliminate or mitigate potential tort exposure arising from UAS manufacture and operation, it can be difficult to assess exposure given the lack of uniform laws and regulations. At present, states are enacting legislation that prohibits or restricts the use of UASs, including photography of individuals or private property. Other states are considering UAS legislation that would prohibit or otherwise regulate the sale, distribution, use, and operation of UASs for other purposes.

A patchwork of state laws would create even more havoc in this area of emerging legal issues. In light of the upcoming rulemaking by the FAA, there should be a push for an express regulatory preemption provision that would preempt state or local regulation of UAS sale, distribution, use, or operation.

There currently are no federal statutes or regulations that expressly preempt state or local regulation of UASs. There is a body of case law holding that federal law occupies the field of air safety regulation, thus impliedly preempting state and local law. The problem with such “implied preemption” is that it would result in UAS manufacturers and operators filing declaratory/injunctive actions around the country to challenge state or local UAS regulations on preemption grounds and the results would be unpredictable and sporadic.

The most comprehensive and cost-effective solution would be for the FAA to promulgate an express preemption regulation that bars states and local governments from imposing any requirement, prohibition, or restriction relating to the sale, distribution, use, or operation of UASs. Such a regulation would be within the FAA's authority under Section 332 of the FAA Modernization & Reform Act of 2012. The industry should provide the FAA with the text of a proposed preemption regulation and explain why it should be included in the proposed rulemaking.

Key Action Items

Following are some key action items to take advantage of the new UAS opportunities, and at the same time, protect against the associated tort risks:

• Seek Section 333 approval to allow legal commercial operation of UASs.
• Ensure that UAS products comply with Federal Aviation Regulations where feasible, and are designed and manufactured to allow for approved commercial operations.
• Make certain that UAS products conform to all government standards and, where possible, industry standards, and that state of the art and best practices are followed.
• Manufacturers who design their UASs in accordance with directions and specifications supplied by the purchaser should have their designs reviewed and approved by that customer to help establish the Contract Specification Defense.
• Apply for SAFETY Act coverage for UAS technologies used for any security purposes.
• Adopt appropriate indemnification provisions and consider other methods to limit or shift liability through contractual terms and conditions.
• Discuss options for government indemnification for ultra-hazardous activities.
• Obtain UAS insurance prior to manufacturing or operating a UAS, and always inquire with your current insurers whether UAS coverage can be added as part of an existing policy.
• Ensure that vendors have insurance, agree to indemnify you, and add you as an additional insured on their policies.
• Urge the FAA now ' before a notice of proposed rulemaking is issued ' to promulgate a federal preemption regulation.

Lisa Norrett Himes and Raymond B. Biagini are litigation partners in McKenna Long & Aldridge LLP's Washington, DC, office. Dane B. Jaques is an aviation partner in the firm's Northern Virginia office.

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