Corporate responsibility is a growing topic of debate in courtrooms, and recent events are pushing U.S. legislators to establish laws that determine and govern corporate criminalization. (See sidebar, p. 32.) The manufacture and distribution of defective products may soon become criminal activities, and the corporate officers and directors whose companies make the defective products could become the criminals.
The Ford/Firestone tire debacle and the resulting media scrutiny brought the issue of corporate accountability to the forefront of public debate (for a detailed analysis, see "The Power of Public Opinion," RM, May 2001). Thus far, the only federal legislation to be considered imposes criminal penalties against motor vehicle manufacturers for noncompliance with product defect reporting requirements. This kind of legislation, however, could quickly expand.
Loss Prevention Should Be Business Specific
Product manufacturers have typically dealt with the risks associated with their products in one of two ways: (1) through assumption of those risks (i.e., calculating sufficient company funds to cover any economic loss resulting from the product); or (2) by transferring the risk to another party (e.g., an insurer).
The means of dealing with risk, however, should do more than protect a company's bottom line. To minimize the risk of criminal prosecution, product manufacturers should be able to demonstrate that they have made sufficient efforts to (1) identify the risks associated with a particular product; and (2) reduce the risk that someone will be injured when using that product.
A manufacturing business is responsible for a product from its conception to the time it lands in the users' hands. An effective loss prevention policy requires that the designer take all of the following into account:
* How the product will be used and how it can be misused
* Types of injuries the product may cause
* Possible alternative designs
* All necessary testing
* Materials to be used in the manufacturing process
* Warnings that should be incorporated into or with the product
* Information that should be included in the product literature and in the instruction manual
Steps to Prevent Criminal Liability
Because there are so many loss prevention requirements to track, the following set of rules will help you guide your organization through the maze of both civil and criminal liability:
Document the design process. Manufacturers must provide employees with the necessary framework for properly documenting all the steps involved in product development activities and decisions. Nearly all documents concerning the research and development of a product are discoverable in a civil or criminal trial and may be reviewed by a jury in a civil lawsuit or in a criminal case. A properly documented product file will therefore greatly reduce a company's potential exposure to civil or criminal prosecution.
With this in mind, product development files should be created with the assistance of the company's general counsel or an experienced outside firm to demonstrate that all product safety issues were considered and addressed in the design process. Through this approach, a company can demonstrate that it has a careful and thoughtful approach when introducing its products to the marketplace, thus reducing the risk of criminal charges against corporate management.
Quality assurance. The recognized quality assurance standard is ISO 9000. By implementing this standard (with its mandatory documentation requirements) into the manufacturing process, a manufacturer will have gone a long way toward reducing manufacturing defects and effectively reducing the risk of loss. The ISO 9000 documentation requirements also provide focus for initiating a product development documentation program.
Proper reporting. To focus on the early detection of product safety problems, remediation and reporting, the product manufacturer's internal company policy must identify the specific situations requiring reports to a government agency (e.g., the Consumer Product Safety Commission in the case of a product recall). Again, a product development documentation program should serve as the platform for this type of program.
Know your distributor. Companies that outsource product manufacturing could also be implicated in a criminal case. Manufacturing contracts must be closely reviewed to make certain that the manufacturer is responsible for conducting adequate testing and that its products conform to design standards. Product distributors can further insulate themselves from the threat of civil and criminal liability by conducting a complete due diligence review of the product manufacturer's internal quality control procedures.
Avoiding criminal charges is not the only benefit of diligent product development policies and practices. Increased attention to product safety means fewer claims and improves the company's loss history. This translates into lower insurance premiums and higher quality assurance. In addition, manufacturers using this approach should be better able to take advantage of captive or self-insurance arrangements, including direct economic benefits such as lower overall defense costs and claims experience.
If criminal charges are brought, however, diligent policies and practices diminish the opportunity costs associated with defending a lawsuit. No company can afford to have its engineers and marketing personnel prevented from performing their day-to-day job functions because they are tied up in requests for documents and interviews by defense counsel. If a lawsuit is brought, the company will not need to undergo an extensive document collection and review process. This information will be organized in the product development file, which serves as a running commentary and testament to the efforts taken by the company to develop a reasonably safe product.
Recent History of Product Liability Criminalization
The Transportation Recall Enhancement Accountability and Documentation Act (TREAD Act) was signed into law by former President Bill Clinton on November 1, 2000. The TREAD Act imposes stiff criminal penalties against any officer or director of a motor vehicle manufacturer who makes a false or misleading statement with the specific intent to mislead the secretary of transportation about a defect in the company's products that may cause death or serious bodily injury. These penalties include criminal fines, imprisonment up to fifteen years or both. Significantly, the TREAD Act does not preempt compensatory and punitive damages imposed by civil juries under state laws resulting from such a false or misleading statement.
Following in the path of the TREAD Act, in late 2000 several more expansive bills were introduced to Congress that, if enacted, would have imposed criminal sanctions against corporations and corporate officers and directors outside the automotive industry for knowingly manufacturing and distributing defective products. For example, Senator Dianne Feinstein (D-CA) proposed the Defective Product Penalty Act of 2000. Senator Feinstein's proposal would have made it a federally criminal offense to knowingly manufacture and distribute "a product with some flaw in design, manufacture, assembly, or instruction that renders the product dangerous to human life and limb beyond the reasonable and accepted risk associated with such or similar products lacking such a flaw." Similarly, Senator John McCain (R-AZ) introduced legislation establishing criminal penalties against manufacturers that knowingly introduce into interstate commerce any motor vehicle or motor vehicle equipment with a defect that causes death or serious injuries.
Under the Feinstein and McCain proposals, forms of which are still under consideration, manufacturers would be subject to criminal penalties, including large criminal fines and imprisonment, for knowingly introducing a defective product into the stream of commerce. Unfortunately, these proposals do not provide arty specific standards for determining how the knowing requirement can be satisfied, but corporate records concerning the design and testing of a product will play a large role in a criminal case when establishing the knowledge requirement of the company under prosecution.
Mark B. Seiger is a partner and Michael T. Griffen is an associate with Edwards & Angell.
Mark B. Seiger is a partner with the Hartford, Connecticut-based Edwards & Angell LLP. (email@example.com)
Michael T. Griffin is an associate with the Hartford, Connecticut-based Edwards & Angell LLP, a national law firm with one of the largest insurance and reinsurance practice groups in the United States. (firstname.lastname@example.org)…