Duty to Warn and Third-Party Conduct: A Look at Two Recent New York Cases

N.Y.C. Asbestos

In N.Y.C. Asbestos, the Court of Appeals addressed issues left unresolved by its decision in Rastelli. In an opinion authored by Judge Sheila Abdus-Salaam and joined by four other judges (Judge Michael J. Garcia concurred in the result, discussed infra, and Judge Janet DiFiore did not take part. Id. at *5 (Garcia, J., concurring)), the court established that a manufacturer “has a duty to warn of the danger arising from the known and reasonably foreseeable use of its product in combination with a third-party product which, as a matter of design, mechanics or economic necessity, is necessary to enable the manufacturer's product to function as intended.” Id. at *1-2 (majority opinion).

N.Y.C. Asbestos involved two cases consolidated on appeal, in which plaintiffs asserted failure to warn claims against defendant Crane Co. Id. at *7, *13. Crane manufactured valves and, in the 1930s, sold its valves to both the Navy and General Motors to be installed in high-pressure, high-temperature steam pipe systems. However, to enable its valves to function properly in such systems, steam pipe system operators were also required to install component parts, including “gaskets, insulation and packing for the valve stems” (“components”). Id. at *2. While Crane's valves neither contained asbestos nor were otherwise hazardous, the components installed in connection with Crane's valves did contain asbestos.

From 1960 to 1977, one plaintiff's decedent served in the Navy as a boiler technician and a staff liaison. From 1960 to 1979, the other plaintiff's decedent was employed as a pipe fitter in a GM factory. Both routinely performed work on Crane valves and the asbestos-containing components that enabled the valves to function. As a result of their exposure to asbestos fibers contained in the components, each decedent was diagnosed in 2010 with pleural mesothelioma. Both died shortly after commencing the lawsuits at issue against Crane.

Although the asbestos-containing components to which the decedents were exposed were not manufactured by Crane, the evidence established that Crane both promoted the installation of asbestos-containing components in connection with the use of its valves, and knew that the Navy and GM engaged in this practice on an ongoing basis after the initial sales. Id. at *38-40, *42-43.When it supplied the valves, Crane packaged them with asbestos-containing components and supplied technical specifications that called for the use of asbestos-containing components. Id. at *2-3, *11. Aware that the components tended to wear out, Crane also marketed an asbestos-containing material, “Cranite,” from which consumers could generate replacement components. Crane endorsed the use of Cranite components in catalogs and, while it noted the existence of alternative components, it did not specify whether the alternative components were suitable for use in the high-pressure, high-temperature systems employed by the Navy and GM.

In each case, the trial court denied Crane's motion to set aside the jury verdict in favor of the plaintiff, rejecting Crane's arguments that the court erroneously instructed the jury that Crane owed a duty to warn of any foreseeable misuse of its product and that the evidence was insufficient to support a finding that it owed a duty. In re N.Y.C. Asbestos Litig., 36 Misc. 3d 1234(A), 2012 NY Slip Op. 51597(U), (N.Y. Sup. Ct. 2012); In re Eighth Judicial Dist. Asbestos Litig., No. 2010-12499, 2013 WL 9816609, at *5 (N.Y. Sup. Ct. March 15, 2013). Crane appealed both decisions and the intermediate appellate courts, the Appellate Divisions for New York's First and Fourth Judicial Departments, affirmed. In re N.Y.C. Asbestos Litig., 121 A.D.3d 230, 255 (1st Dept. 2014); In re Eighth Jud. Dist. Asbestos Litig., 115 A.D.3d 1218, 1218 (4th Dept. 2014).

The most significant issues on appeal before the Court of Appeals concerned: 1) the circumstances under which New York law would impose a duty on a manufacturer of a non-hazardous product to warn against the combined use of its product with a hazardous, third-party product; and 2) whether the evidence adduced at trial was sufficient to support the recognition of a duty under the applicable legal standard.

In assessing whether a manufacturer in Crane's position has a duty to warn, the court first turned to the general factors considered in determining the existence of a duty. The court explained that, in performing a duty analysis, a court must take into account which party is “best positioned to avoid the harm in question,” how the “presence or absence of a duty” would tend to serve public policy, whether “risks, burdens and costs” will be reasonably allocated among the parties, and whether there is a “logical basis” for the proposed duty. N.Y.C. Asbestos, 2016 WL 3495191, at *17.

The court found particular significance in the superior position of Crane as a manufacturer, when compared with users of its product, to discern and warn against potential risks, noting that a manufacturer retains its “superior ability to garner information” even when its product is used together with another manufacturer's product. Id. at *22. Moreover, the court determined that, as between two manufacturers, a manufacturer of a “durable” product (such as a valve) is in a superior position to a manufacturer of a “wear” product (such as packing or insulation for that valve) to assure that a user of those products in tandem receives a warning. The court observed that, because end users are “more likely to interact with the durable product over time,” there is a greater likelihood that these parties will review warnings and consult related materials associated with the durable product. Thus, the court concluded that a manufacturer's superior ability to warn against the dangers of joint use militates in favor of the recognition of a duty to warn, particularly where its product is a durable product and the third party's product is a wear product. Id. at *23.

The court first concluded that additional factors supported the recognition of a duty to warn. See id. at *24-25 (determining that imposing a duty on the manufacturer under these circumstances would better serve New York public policy and that it would likely have a “balanced and manageable economic impact” in terms of both the manufacturer's cost of compliance and costs relating to litigation and liability). It next examined Rastelli to consider whether imposing a duty would have a “logical basis” and to delineate the circumstances under which a duty would attach. The court explained that, to establish the requisite “logical basis” for a duty to warn in the context of joint use, a “close connection” must exist with respect to “the manufacturer's product, the other [company's] product and their uses.” Id. at *25-26.

To determine whether a “close connection” exists, the court derived the following factors to consider from its decision in Rastelli: 1) whether the manufacturer's product can “practically function” without the other company's product; 2) whether the manufacturer had “control over the production” of the other company's product; 3) whether the manufacturer played a role in placing the other company's product into the stream of commerce; 4) whether the manufacturer derives a benefit from the sale of the other company's product; and 5) whether the manufacturer contributed to the alleged defective condition. Id. at *20, *26. On the basis of these factors, the court held that a manufacturer “has a duty to warn of the danger arising from the known and reasonably foreseeable use of its product in combination with a third-party product which, as a matter of design, mechanics or economic necessity, is necessary to enable the manufacturer's product to function as intended.” Id. at *26.

In evaluating the first of these factors, the court rejected Crane's view that “a duty to warn arises only if the manufacturer's product is physically incapable of working without the other company's product.” Id. at *31. Reasoning that the existence of a duty turns largely “on a reasonable and fair allocation of costs and burdens,” the court concluded that requiring mechanical necessity would be inappropriate where safer, alternative products are only available at cost-prohibitive prices. Id. at *31-32. The court noted that, in the absence of reasonably priced alternatives, Crane's proposed rule would unduly shift to consumers the burden to either identify and warn against the dangers inherent in the combined use of the products or purchase safer, alternative products at economically unsustainable prices. Id. at *32.

To avoid placing on consumers what the court viewed as an inequitable burden, it held that a duty to warn may arise where the “evidence supports an inference” that the dangerous third-party product constitutes the only product that both enables the manufacturer's product to function properly and is available at a “reasonably sustainable” cost. Id. at *33. However, the court cautioned that “[p]ractical necessity, not relative affordability, is the key.” Id. The court explained that the existence of financial necessity does not turn on “any kind of cost/utility analysis” and that a manufacturer does not have a duty to warn simply because “there is a version of an essential third-party product … which is cheaper and more hazardous than the alternatives.” Id. at *32-33.

Applying this rule to the facts, the court concluded in both cases that the use of the third-party, asbestos-containing components with Crane's valves was a practical necessity. Id. at *40-43. For instance, the court found in one case that, even if use of the components were not mechanically necessary, use of the components was economically necessary because: 1) Crane exclusively promoted the use of the components as the only “affordable and mechanically viable” option; and 2) the Navy and other consumers' exclusive use of the components suggested an absence of financially feasible alternatives. Id. at *41. The court further held that the remaining factors militated in favor of imposing a duty to warn on a manufacturer in Crane's position, particularly to the extent that the evidence reflected Crane's intent that users engage in the combined use of the two products at issue. Id. at *27.

Crane argued that it had no duty to warn because, like the manufacturer in Rastelli, it had no control over the production of the asbestos-containing components and did not place those products in the stream of commerce. While the court conceded that Crane lacked control over the production of the third-party components, it appeared to distinguish Rastelli with respect to the other factors on the ground that, unlike the defective rim assemblies in that case, installation of these dangerous third-party components here was a practical necessity. See id. at *19, *27, *28 (noting that Goodyear's product was compatible with other third-party products and citing practical necessity as the reason the remaining factors supported recognition of a duty with respect to Crane). The court reasoned that a manufacturer in Crane's position plays a “substantial, albeit indirect,” role in introducing dangerous third-party components into the stream of commerce by creating a “profitable market” for the dangerous components, without which the manufacturer's product is incapable of functioning. Similarly, the court reasoned that a manufacturer such as Crane stands to benefit from the sale of the dangerous third-party components because, in the absence of those sales, the manufacturer would be unable to sell its own product. With regard to the final factor, the court determined that a manufacturer in Crane's position significantly contributes to the dangerous condition responsible for a plaintiff's injury to the extent that its product is “critical to the dangerous joint use of the two products.”

The court further concluded that the evidence adduced at trial was sufficient to support the juries' findings that Crane either knew or should have reasonably foreseen that the users of its valves would install the asbestos-containing components and that Crane learned that its customers continuously engaged in this practice after the initial sale of the valves. Id. at *38-39, *42-43. As the court had also resolved the remaining issues on appeal in favor of the plaintiffs (Id. at *43-44, *46-47), the court affirmed the lower courts' decisions, holding that Crane violated its duty to warn against the risks inherent in the known and reasonably foreseeable use of its product in combination with the asbestos-containing, third-party components. Id. at *47-48.

The court's decision in N.Y.C. Asbestos establishes a standard governing a manufacturer's duty to warn in the context of joint use, but it may have created more questions than it answered for manufacturers. In an opinion that concurred with the result, Judge Michael J. Garcia argued that the majority's rule “opens too broad an avenue of potential liability” and proposed that the court should have adopted a narrower rule “focus[ing] on the affirmative action taken by the manufacturer in placing the harmful product containing asbestos into the stream of commerce.” Id. at *1 (Garcia, J., concurring). Judge Garcia expressed particular concern with the court's decision to extend the duty to warn to instances involving either mechanical necessity or economic necessity, noting that the task of determining “[w]hat level of necessity is required and when it may arise” will be left to “future juries in an expanding pool of litigation.” Id. at *4.

Furthermore, a practical problem arises with the court's determination that Crane, as a durable product manufacturer, was in a superior position to warn vis-à-vis the manufacturer of the asbestos-containing components. It is far from clear that consumers either are significantly more inclined to inspect warnings associated with durable products or how heavily courts will weigh the presence or absence of this factor in future cases. Thus, it will be difficult for manufacturers to predict when a duty to provide a warning in the context of joint use applies until case law interpreting these issues is further developed.

Pasternack

In Pasternack v. Laboratory Corp. of America Holdings, a physician and part-time airline pilot, Fred Pasternack (plaintiff), filed an action in federal court against Laboratory Corporation of America (LabCorp) and ChoicePoint, asserting claims of negligence and fraud. Pasternack v. Lab. Corp. of Am., 892 F. Supp. 2d 540, 542 (S.D.N.Y. 2012). The district court held in favor of the defendants as to both claims on a motion to dismiss. Pasternack v. Lab. Corp. of Am., No. 10 CIV. 4426 PGG, 2011 WL 3478732, at *1 (S.D.N.Y. Aug. 1, 2011); Pasternack v. Lab. Corp. of Am., No. 10 CIV. 4426 PGG, 2014 WL 4832299, at *1 (S.D.N.Y. Sept. 29, 2014). On appeal to the U.S. Court of Appeals for the Second Circuit, the New York Court of Appeals accepted certification of two important questions concerning unresolved issues of New York law: 1) whether federal drug testing regulations and guidelines create a common law duty of care for drug testing laboratories and test program administrators; and 2) whether a plaintiff may establish the reliance element of a fraud claim by demonstrating that a third party relied on a defendant's false statements to the plaintiff's detriment. The court, in a 4-3 decision, answered each certified question in the negative. Pasternack v. Lab. Corp. of Am., No. 112, 2016 WL 3543713, at *2, *12, *17 (N.Y. June 30, 2016); id. at *1 (Stein, J., dissenting in part); id. at *16 (Fahey, J. dissenting).

Pursuant to FAA regulations, plaintiff's employer notified him that he had been randomly selected for drug testing and would be required to produce a urine sample. Choice-Point administered the plaintiff's employer's drug-testing program. LabCorp contracted with ChoicePoint to perform testing services in connection with the program. Upon arriving at a LabCorp facility for his drug test, the plaintiff was unable to produce a sufficient quantity of urine for testing, and a LabCorp employee informed him that he would need to provide another sample. The plaintiff subsequently left the facility and, upon returning a few hours later, produced an adequate specimen.

Although his sample tested negative for illicit drugs, the LabCorp employee nevertheless noted on a chain-of-custody form that the plaintiff had left the facility during testing. A Medical Review Officer employed by ChoicePoint later reviewed the chain-of-custody form, determined that the plaintiff's failure to remain at the collection site constituted a “refusal-to-test,” and reported the determination to the FAA. Upon receiving and investigating the report, the FAA revoked the plaintiff's airman certificates and Aviation Medical Examiner certification. The plaintiff challenged the FAA's decision and, after a series of administrative proceedings and appeals, succeeded in having his certificates reinstated. During the pendency of these proceedings, he filed the federal court action asserting claims of negligence and fraud.

The plaintiff alleged that ChoicePoint and Lab-Corp were negligent in failing to carry out their laboratory testing duties in accordance with federal regulations and guidelines. He further alleged that ChoicePoint violated 49 CFR § 40.335(i) by determining that he had refused to test, which is expressly prohibited under the regulation. The plaintiff alleged that LabCorp violated 49 CFR § 40.193(b) and related guidelines by failing to explain the “shy bladder” procedures and failing to notify him that, if he left the facility, his departure would amount to a refusal to test.

Regarding the issue of whether the defendants owed the plaintiff a duty of care, the court noted that, in 2013, it considered a similar issue in Landon v. Kroll Laboratory Specialists. Pasternack, 2016 WL 3543713, at *10. In that case, the court considered whether a drug-testing laboratory could be held liable to a test subject for allegedly engaging in misconduct that resulted in the reporting of a false positive. The court there held in favor of the plaintiff, concluding that the laboratory owed a duty to conduct the subject's drug test in accordance with “professional standards.” Interpreting its holding in Landon narrowly, the court in Pasternack held that drug-testing laboratories and program administrators do not have a common law duty to comply with regulations and guidelines that are “ministerial in nature” and “do not implicate the scientific integrity of the testing process.” Id. at *12. The court noted that it explicitly confined its holding in Landon to its facts and that, irrespective of the applicability of federal regulations and guidelines, a laboratory's duty to “ensure accurate testing procedures” does not extend to every aspect of the testing process. Id. at *11.

The court emphasized that recognizing a duty of care under New York negligence law in Pasternack would be particularly inappropriate because the applicable regulations and guidelines were designed to protect “the public, not test subjects.” Id. at *11. Moreover, the court reasoned that broadening the scope of the duty to encompass ministerial rules would engender a proliferation of litigation and a likelihood of limitless liability. Id. at *12. Thus, the court concluded that recognizing a duty under the circumstances would be unwarranted in light of precedent, the purpose of the rules at issue, and the need to protect against potentially uncontrollable legal consequences.

The plaintiff's fraud claim was premised on the allegation that a LabCorp employee falsely stated to FAA investigators that she was unable to inform the plaintiff of the consequences of leaving the test facility due to the plaintiff's unwillingness to cooperate. The court found that, while the FAA might have relied on this false statement to the plaintiff's detriment, resulting in the revocation of his licenses, only the plaintiff's own reliance can satisfy the reliance element of a fraud claim under New York law. Id. at *13, *17.

The court acknowledged disagreement among courts applying New York law regarding whether a fraud claim can be predicated upon third-party reliance. Id. at *13-14. In rejecting cases adopting third-party reliance, the court concluded that those decisions were based on an erroneous interpretation of its landmark decision in Eaton Cole & Burnham Co. v. Avery. Id. at *15. There, the court held that a plaintiff may establish fraud based on “indirect communication,” provided that the defendant intended that the misrepresentation “be communicated to the plaintiff and that the plaintiff rely on it.” Id. Having determined that Eaton was limited to indirect communication with the plaintiff, the court held that this decision did not support the plaintiff's fraud claim because he neither received nor relied upon the LabCorp employee's statements. Id.

In a dissenting opinion, Judge Eugene Fahey disagreed with the court's decision to limit fraud claims involving third-party communications to situations where the plaintiff receives and relies on the misrepresentation. Judge Fahey expressed concern that the practical effect of the court's refusal to recognize third-party reliance would be to “facilitate the commission of fraud by straw man and to ease the practice of deceit.” Id. at *15 (Fahey, J., dissenting). Arguing that an alternative approach was “compatible with existing case law,” Judge Fahey suggested that a plaintiff should be permitted to maintain an action based on a third-party's reliance if the plaintiff establishes that the “misrepresentation was made with the intent of influencing the plaintiff and causing injury.” Id. at *9. Nevertheless, under the current state of New York law as articulated once again by the majority in Pasternack, a plaintiff must establish personal reliance on the defendant's misrepresentation to recover in an action for fraud.

***** Jeffrey S. Lichtman and Richard A. Menchini are partners at O'Hare Parnagian. Thomas J. Cummings, an associate fellow at the firm, assisted with the preparation of this article. This article also appeared in The New York Law Journal, an ALM sibling publication of this newsletter.