Purchasing and Product Liability
Product liability is the responsibility of a manufacturer or seller for injury caused by a product. Both industrial and consumer goods organizations can "purchase liability" and increase organizational vulnerability in today's uncertain legal environment. A definite need exists for federal product liability reform, and purchasing should assume a proactive posture in lobbying for change in today's legal environment. In the interim, there are a variety of interrelated strategies available to purchasing managers that can serve to reduce the organization's vulnerability to product liability actions. Widespread agreement exists today that U.S. industry is facing a product liability crisis. Both manufacturers and resellers of consumer and industrial products are confronted with increasing numbers of product liability suits and dramatically escalated settlements. The cost of product liability insurance has increased tremendously in certain industries, and the availability of coverage has decreased. Consequently, the competitiveness of many U.S. industries has been reduced severely in both domestic and international markets. American manufacturers are, for example, currently forced to pay product liability insurance premiums that are approximately 20 times higher than those paid by European businesses. Indeed, the problems facing U.S. industry have become so critical that former President Reagan proposed statutory reforms relating to product liability in an attempt to restore the competitiveness of U.S. firms in global markets.
The purpose of this article is to review the current product liability crisis facing industrial managers. Throughout the discussion, particular emphasis is placed on the importance of the purchasing function as it relates to product liability. The discussion begins with a brief, nontechnical review of product liability theory, followed by a description of the current product liability environment facing today's purchasing manager. A brief discussion of the prospects for federal product liability reform is also provided. The article concludes with some suggestions that may assist managers in their efforts to cope with and adapt to today's product liability issues.
PRODUCT LIABILITY THEORY
As described by Prosser, "products liability is the name currently given to the area of case law involving the liability of sellers of chattels to third persons with whom they are not in privity of contract." More simply, product liability encompasses the responsibility of a seller for personal injury resulting from product use. A liability suit can be brought against the organization by a buyer, an employee, or a third party bystander who is injured by the product in question. Manufacturers, suppliers, and resellers can be named as defendants in product liability actions. Awards made to injured parties may include both "compensatory" and "noncompensatory" damages. Compensatory awards refer to damages that reflect actual losses sustained by the injured person (e.g., payment for medical expenses); noncompensatory (or noneconomic) awards refer to payment for "pain and suffering" and/or punitive damages (e.g., penalties for reckless or malicious conduct by the defendant).
Liability can be established on the basis of any one or more of a number of tests or theories: negligence, breach of warranty, or strict liability in tort. Injured parties may seek recovery for injury under any or all of these tests for liability. Negligence, is, without question, the test most familiar to management in that it focuses on the actions (or inactions) of the seller or producer. For example, failure to maintain adequate quality control may result in product failure that leads to personal injury. Similarly, negligence can derive from a failure to warn customers or employees of an inherent product danger or risk. In both cases, it is the action(s) of the seller that establishes the liability. …