Statute of Repose: Is Equipment Installed as Part of Building Renovations Considered a “Product” or “Construction”?

Donald A. Rea | Construction Industry Counselor | November 1, 2018

Resolution of the question is critical to the application of product liability statutes or construction law and their often differing statutes of limitation and repose.  It was recently addressed in Puente v. Resources Conservation Co., Int’l, No. 76604-0-I, 2018 WL 5146983 (Wash. App. Oct. 22, 2018).  There, the personal representative of the estate of Javier Puente sued several parties under product lability law when he suffered fatal boric acid burns while performing maintenance on a pump system installed in a manufacturing facility.  The estate sued under product liability law, but the trial court granted summary judgment based upon a six-year statute of repose governing construction related to “any improvement upon real property.”  Id. at * 1.

The State of Washington Court of Appeals reversed, and held as follows:  “With respect to those who service or design items installed within a building, … they could easily avoid product liability law, if they desired, by simply bolting, welding the equipment or fastening it in some other manner to the building…. Mechanical fastenings may attach a machine to the building, but they do not convert production equipment into realty or integrate machines into the building structure, for they are not necessary for the building to function as a building.”  Id. at * 4 (internal quotation marks and citations omitted).  While integral to the manufacturing process at issue, the faulty equipment installed in the facility was not so integrated into the facility as to render it part of the structure.  Indeed, the court held that the equipment was “simply ‘house[d]’ within the environmental building.”

Because the court deemed the equipment unnecessary to the function of the building (unlike an HVAC system for example), it concluded that it was not “construction” and was, therefore, subject to product liability law, and not subject to a six-year statute repose that would bar the claim.  When considering actions and defenses arising out of the installation of equipment in construction projects that is not integral to building operations, counsel should carefully consider whether product liability or construction law applies in each jurisdiction.  Varying applications will have significant effect on the law governing particular claims and defenses.

Supreme Court of Minnesota Holds Ventilator Motor Incorporated Into a Home’s HVAC System Qualifies as “Machinery” Excepted From the State’s Ten-Year Statute of Repose

John J. Gazzola | Pepper Hamilton LLP | July 26, 2018

Great N. Ins. Co. v. Honeywell Int’l, Inc., No. A16-0997, 2018 Minn. LEXIS 236 (May 9, 2018)

This case arises out of a residential construction project and the installation of ventilators into a home’s HVAC system. Sixteen years after completion of the work, a fire occurred in one of the ventilators, causing property damage. After paying the homeowners’ insurance claim, Great Northern Insurance (“Great Northern”), as subrogee, filed suit against McMillan Electric Company (“McMillan”), the manufacturer of the motors in the ventilators, asserting claims for product liability, breach of warranty, and negligence, including a claim for breach of a post-sale duty to warn consumers of the risk of fires in ventilator motors.

The trial court granted McMillan summary judgment concluding that Minnesota’s 10-year statute of repose barred all of Great Northern’s claims except for the post-sale duty to warn claim, which also failed because McMillan owed no such duty. The Court of Appeals reversed both holdings. On appeal, the Supreme Court affirmed the Court of Appeals’ decision that McMillan’s motor was “machinery,” to which the statute of repose does not apply.

In reaching this conclusion, the Supreme Court explained the purpose of Minnesota’s statute of repose and the types of claims to which it applies. According to the Court, the statute is intended to avoid litigation of stale claims by barring actions relating to the defective construction of improvements to real property that accrue more than 10 years after a construction project achieves substantial completion. However, as an exception to this bar, the statute provides that “[t]he limitations prescribed in this section do not apply to the manufacturer or supplier of any equipment or machinery installed upon real property.” Minn. Stat. § 541.051, subd. 1(e). Here, the parties stipulated that the ventilators incorporated into a home’s HVAC system constitute an improvement to real property. Therefore, the Court reasoned that the statue of repose barred Great Northern’s claims unless McMillan’s motor constituted “equipment or machinery installed upon real property.”

In arguing that the statute of repose applied, McMillan argued that the ventilator (and its motor) was akin to “ordinary building materials” rather than “equipment or machinery” because it was part of a home’s systems and structure. According to McMillan, the machinery exception should apply only where the machinery assists “in some operation, activity or particular use of the building[.]” The Court rejected this argument, however, concluding that the statute’s plain language requires consideration of the material’s nature and function, rather than its integration into a structure.

Ultimately, the Court held that the motor fell within the machinery exception to the statute of repose. The Court reasoned that the ventilator containing McMillan’s motor constituted “machinery” because it consisted of a motor, fans, air filters and a heat-exchange core that modified and transmitted mechanical energy to efficiently regulate a home’s climate. The motor therefore was excepted from the time bar in Minnesota’s statute of repose and Great Northern’s claims for breach of warranty, negligence, and product liability could proceed.

Product Liability in the USA

Walter L. Cofer and Alicia J. Donahue | Shook Hardy & Bacon | July 30, 2018

Use the Lexology Navigator tool to compare the answers in this article with those from other jurisdictions.    

General climate and recent developments

State of legal development

In general terms, how developed are the product regulation and liability laws in your jurisdiction?

The United States has well-developed product liability laws. State law has been developing the nation’s product liability law for over a century:

  • 1916 – MacPherson v Buick Motor Co was the first case to apply negligence concepts in a product manufacturing and design defect context.
  • 1963 – California adopted the first strict liability theory of recovery in Greenman v Yuba Power Prods Inc.
  • 1965 – the American Law Institute codified strict liability in Section 402(A) of its Restatement (Second) of Torts. The section has since been adopted by the vast majority of states.
  • 1998 – the Restatement (Third) of Torts reframed strict liability law in certain important respects, but these have not been widely adopted.

The diversity of US product liability law and the general availability of punitive damages, class actions and contingency fees create fertile ground for product liability claims in the United States.

Recent developments

Have there been any notable recent developments in relation to product liability law and product safety law in your jurisdiction, including any regulatory changes and case law?

In recent years, US courts have considered the concept of federal pre-emption of state laws more closely as a fundamental part of the Constitution (in the context of state law consumer protection actions). This case law primarily involves pharmaceutical and medical device products and may play a key role in the defence of consumer product claims since Congress approved the Consumer Product Safety Improvement Act. While this act requires the Consumer Product Safety Commission to impose stricter requirements for consumer goods, it explicitly pre-empts certain state law product claims.

Further, in the last decade, the Supreme Court has issued two decisions that substantially strengthened a defendant’s ability to extract itself from a case before entering discovery via a motion to dismiss the complaint. Following Iqbal and Twombly, federal courts now impose a higher pleading standard (or more stringently enforce the same pleading standard).

Legal framework

Legislation

What primary and secondary legislation governs product safety and liability in your jurisdiction?

No uniform product liability statute or common law exists in the United States – each state defines product liability law under its own standards. However, product liability claims are generally brought under the scope of strict product, tort (negligence or fraud) and warranty.

Further, most states have a version of a deceptive trade practices act or consumer protection statute. Typically, these laws proscribe certain types of sale and marketing practice as unconscionable or deceptive. Some such statutes provide for enhanced penalties and presumptions which favour consumers and allow a prevailing plaintiff to recover attorney’s fees from the defendant.

Regulatory and enforcement authorities

Which government authorities regulate and enforce product safety and liability laws in your jurisdiction, and what is the extent of their powers?

No uniform product liability statute or common law exists in the United States – each state defines product liability law under its own standards. However, certain industries are more highly regulated at the federal level than others (eg, the pharmaceutical, medical device and automotive industries).

Liability

Product defects

How is a ‘product defect’ defined in your jurisdiction?

The states define ‘product defect’ in numerous ways. Generally, a jury will determine whether an alleged product defect exists under one or a combination of two separate defect tests:

  • the consumer expectations test; and
  • the risk-utility test.

The consumer expectations test provides that a product is unreasonably dangerous if it is dangerous to an extent beyond that which would be contemplated by an ordinary consumer with knowledge of the product common to the community.

The risk utility test attempts to balance the utility of the product against the risks of its particular design.

Broadly speaking, a product can be defective in one of three ways:

  • Manufacturing defect – if the product left the defendant’s control with a material deviation from the its intended design specifications, formula or performance standards (one-off rather than systemic).
  • Design defect – if the design of the product at issue, rather than an error in the manufacturing process, is alleged to be the cause of the defect (a systemic rather than one-off defect).
  • Warning defect – if the defendant’s alleged failure to warn or adequately warn of a reasonable foreseeable danger of the product.

Causation and burden of proof

How is causation of loss or damage established in relation to product liability claims and where does the burden of proof lie? Can this burden be shifted in any way?

Typically, the plaintiff bears the burden of proof on each element of a claim – including causation – though several mechanisms exist for shifting the burden to the defendant. Whether the plaintiff alleges a breach of duty in a tort claim, breach of contract in a warranty claim or product defect in a strict liability claim, the plaintiff must prove by a preponderance of the evidence that the breach or defect proximately caused the plaintiff’s injury.

This analysis involves two distinct concepts: cause-in-fact and policy concerns. The former is often analysed under either the ‘but-for’ or ‘substantial factor’ causation standard, while the latter consider whether, even if the defendant’s conduct factually caused the injury, the relationship between the conduct and the injury is too remote or indirect to support liability as a matter of law.

Some states provide inferences in favour of a plaintiff (eg, a rebuttable presumption of defect where a product malfunctions). In a multi-defendant case, where the plaintiff cannot prove which defendants are liable, the burden of proof may shift to the defendant to prove that they are not the liable party or to show their relative share of liability.

Legal bases for claims

On what legal bases can a product liability claim be brought?

Product liability claims are generally brought under one of three theories:

  • strict product liability;
  • tort (negligence or fraud); and
  • warranty.

Further, most states have some version of a deceptive trade practices act or consumer protection statutes.

Criminal liability

Can a defendant be held criminally liable for defective products?

There is no criminal liability specific to defective products. To be criminally liable under state law, a product manufacturer must have the required level of criminal intent for any other similar crime, otherwise, only the deliberate misrepresentations to federal regulatory bodies with respect to a product that results in death or serious injury may subject officers or agents to criminal penalties.

Liable parties

Which parties can be held liable for defective products?

Theoretically, any entity in the ‘stream of commerce’ – a term of art which usually includes any and all manufacturers, distributors, sellers and importers – may be held liable under a strict liability theory for injury caused by a defective product. Under a negligence theory, only those with a duty to the plaintiff will be potentially liable. Typically, this includes the final manufacturer, but may also include a component parts manufacturer.

Limitation of liability

Can liability be excluded or mitigated in any way?

Many states have so-called ‘sealed container’ or ‘innocent seller’ statutes that insulate non-culpable retailers or other non-manufacturers from liability in certain circumstances.

Litigation

Procedure

What is the procedure for filing a product liability claim before the courts in your jurisdiction?

Generally, in order to file a lawsuit in the United States, a plaintiff must plead the essential facts to make a prima facie case under whichever theories of liability he or she is proceeding. That pleading takes the form of a complaint, which must be served on defendant(s) in the manner required by the local rules where the case is filed. Perfecting service of the complaint on defendant(s) initiates the lawsuit. In order for a court to take up a product liability claim, it must have both personal and subject matter jurisdiction.

Under Federal Rule of Civil Procedure 11, all pleadings must be signed by at least one attorney of record. The signature certifies that:

  • it is not being presented for any improper purpose;
  • the claims, defences and other legal contentions are warranted by existing law or by a non-frivolous argument for extending, modifying or reversing existing law or for establishing new law;
  • the factual contentions have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery; and
  • the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on belief or a lack of information.

Interlocutory motions

Can the court issue interlocutory orders or judgments in product liability cases? If so, what rules and procedures apply?

Courts may issue interlocutory orders or judgments in certain product liability cases. Federal Rules of Civil Procedure 54(b) applies to judgments and 28 US Code Section 1292 applies to interlocutory orders.

Pre-trial disclosure

What pre-trial disclosure/discovery mechanisms are available in product liability cases, if any?

Generally, written discovery requests in the form of interrogatories, requests for production and requests for admission are available. Interrogatories are written questions used in discovery to obtain information from the other party. Each interrogatory must be answered separately and fully in writing under oath, unless it is objected to. The objecting party must state the reasons for objection.

A request for production is a request to produce and permit the requesting party or its representative to inspect, copy, test or sample items in the responding party’s possession, custody or control. It may also be a request to permit entry onto designated land or other property possessed or controlled by the responding party.

A request for admission is a written request for the admission, for purposes of the pending action only, of the truth of any matters within the scope of Rule 26.02 of the Federal Rules of Civil Procedure.

Some states and federal courts require parties to submit initial disclosures of relevant information and documents without waiting for a request from an opposing party.

Oral depositions are another key discovery tool. They may be exclusively used for discovering facts about the case or, in some jurisdictions, be used as a substitute for trial testimony.

Evidence standards

What evidence is accepted to support claims in product liability cases? What formalities apply to evidence submission?

Under Rule 26(b)(1) of the Federal Rules of Civil Procedure, parties may obtain discovery regarding any non-privileged matter which is relevant to the subject matter involved in the pending action, whether it relates to:

  • the claim or defence of the party seeking discovery; or
  • the claim or defence of any other party.

The information sought need not be admissible at trial, but must be reasonably calculated to lead to admissible evidence.

Expert evidence

Under what circumstances will the court appoint an expert to assist it in examining the merits of the case? What rules and procedures apply?

Under Rule 702 of the Federal Rules of Evidence, the court may appoint an expert to assist in examining the merits of a case. If scientific, technical or other specialised knowledge will assist the trier of fact to understand the evidence or determine a fact in issue, then a witness who is qualified as an expert by knowledge, skill, experience, training or education may testify in the form of an opinion or otherwise if:

  • his or her scientific, technical or other specialised knowledge will help the trier of fact to understand the evidence or determine a fact in issue;
  • the testimony is based on sufficient facts or data;
  • the testimony is the product of reliable principles and methods; and
  • the expert has reliably applied the principles and methods to the facts of the case.

Can the parties rely on expert witness testimony to support their claims? If so, what rules and procedures apply?

Under Rule 702 of the Federal Rules of Evidence, parties can rely on expert witness testimony to support his or her claims if:

  • the knowledge is based on sufficient facts, data or opinions;
  • there are sufficient assurances of trustworthiness for the theory;
  • the explanative theory was applied in accordance with proper procedures;
  • the witness is qualified as an expert by his or her knowledge, skill, experience, training or education to provide such knowledge; and
  • the knowledge assists the trier of fact to understand the evidence or determine a fact in issue.

Class actions

Are class actions or any other collective proceedings available for product liability claims in your jurisdiction? If so, what is the procedure for their formation and what benefits do they afford claimants? Are class actions formed on an opt-in or an opt-out basis?

Product liability class actions are permitted under Rule 23 of the Federal Rules of Civil Procedure and applicable state court equivalents. However, collective proceedings are permitted under the Federal Labour Standards Act and do not apply to product liability claims.

Class actions are a procedural mechanism by which a large group of similarly situated plaintiffs may attempt to prosecute a lawsuit based on common claims as a class, instead of individually, as long as certain preconditions are met. A class representative or named plaintiff takes an active role in pursuing the class action claims on behalf of the entire class. Federal Rule of Civil Procedure 23 identifies the circumstances in which class treatment is appropriate in federal courts.

The class action mechanism is designed to simplify litigation involving large numbers of individuals with closely similar claims and encourage uniform decision(s) for the claims. Other benefits afforded claimants in class actions include:

  • providing a group remedy for the class without the cost and delay of multiple separate lawsuits (this is particularly important where individual monetary claims are relatively low, making it unlikely that plaintiffs would proceed individually); and
  • providing the class with more bargaining power than they may have as individuals.

For class actions certified under Federal Rule of Civil Procedure 23(b)(3), class members must be given the right to opt out of the class action. If a class member falls within the definition of a certified Rule 23(b)(3) class and does not affirmatively opt out, that person automatically becomes a class member generally bound by the outcome of the litigation. However, for class actions certified under Federal Rule of Civil Procedure 23(b)(1) and 23(b)(2), class members are not given the right to opt out.

Appeals

What rules and procedures govern appeals of court decisions?

The Federal Rules of Appellate Procedure govern procedure in US courts of appeals. Most states have their own set of appellate rules and procedures that are listed for the public on the state’s websites.

Statute of limitations

What is the statute of limitations for filing product liability claims?

The time limit for filing product liability claims varies by state and is often dictated by statute. The statute of limitations generally ranges from two to four years after the cause of action accrues, depending on the type of action.

Timeframe

What is the typical duration of proceedings in product liability cases?

There is no set timeframe for the length of a product liability case. Each case will vary depending on:

  • the complexity of the matter;
  • the amount of discovery;
  • the time required to try the case; and
  • the nature of the court’s docket.

While many cases settle before trial, most last for several years.

Costs, fees and funding

Can the successful party to the litigation recover court and attorneys’ fees and any other related expenses from the losing party? If so, what rules and procedures apply?

Under the American rule each party pays their own legal fees regardless of who prevails. Although it differs by state, there are statutory exceptions where the prevailing party can recover legal fees from the losing party.

What rules and restrictions (if any) govern contingency fee arrangements?

Contingency fees are permitted in product liability actions. They are usually governed by the state’s rules of professional conduct. Generally, contingency fees range between 25% and 40% of the judgment.

Is third-party litigation funding permitted in your jurisdiction? If so, do any rules or restrictions apply?

Third-party litigation funding is a relatively new concept in the United States. If it exists, laws governing third-party litigation funding vary by state, often focusing on the doctrines of champerty and maintenance and rules regulating attorney conduct. Third-party funding of all types of product liability cases – from individual actions to large multi-district litigations and class actions – is a rising phenomenon in the United States.

Is legal aid (ie, public funding) available to claimants in product liability cases? If so, what rules, restrictions and procedures apply?

Every state makes certain provisions for legal aid to indigent claimants. However, the use of contingency fees has reduced the need for legal aid in product liability claims. Access to legal aid varies by state.

Settlement

What rules and procedures govern the settlement of product liability cases?

Court approval is required for settling certain types of cases such as class actions, wrongful death and cases involving minors or incompetent individuals.

Further, federal law confers subrogation rights to the government when Medicare or Medicaid beneficiaries enter into settlement with an alleged tortfeasor. The law sets mandatory reporting requirements for settling beneficiaries, which plaintiffs and defendants must follow to avoid the statutory penalty of treble damages.

States’ comparative negligence laws can complicate settlement of claims in cases involving joint tortfeasors.

How common are settlements in product liability cases?

Settlements are common in product liability cases. Many variables influence settlement trends and values in product liability cases, including:

  • recent jury verdicts involving similar products;
  • venue;
  • stage of litigation; and
  • case type (eg, single plaintiff or mass tort).

Alternative dispute resolution

Are any alternative dispute resolution (ADR) methods required or advised before or in lieu of proceeding with litigation?

ADR methods including negotiation, mediation and arbitration are available and utilised in product liability cases in state and federal courts.

Federal Rule of Civil Procedure 26(f) requires parties to discuss the possibilities for promptly settling or resolving the case at their initial conference.

Further, many jurisdictions’ local rules authorise courts to mandate mediation between the parties.

How commonly is ADR used in relation to product liability cases in your jurisdiction?

Parties regularly engage in ADR in cases pending in jurisdictions that mandate mediation and sometimes voluntarily choose to engage in various forms of ADR.

Defences

Available defences

What defences are available to defendants in product liability cases?

Available defences vary by state, but typically include:

  • assumption of risk;
  • comparative fault;
  • estoppel;
  • idiosyncratic reaction;
  • learned intermediary;
  • pre-emption;
  • state of the art;
  • statute of repose;
  • statute of limitations;
  • substantial change or product misuse; and
  • unavoidably unsafe products.

Preliminary actions

What preliminary procedural mechanisms are available to defendants, if any?

Defendants can engage a variety of procedural mechanisms early in litigation:

  • Defendants can remove a state court action to the federal court based on diversity jurisdiction. Where similar cases have been coordinated into multi-district litigation, defendants may also move to stay the case in federal court pending transfer to the multi-district litigation court.
  • Following the initial pleadings, defendants can also bifurcate a preliminary issue. Federal Rule of Civil Procedure 42 enables the court to hold separate proceedings for these issues, which can determine the necessity of trying remaining issues.
  • Before trial, defendants often use summary judgment to dispose of specific issues or the entire case.

Further, Rule 53 of the Federal Rules of Civil Procedure allows a judge to appoint a special master to (among other things) address pre-trial and post-trial matters that cannot be effectively and timely addressed by the judge.

Remedies

Damages

What types of damages may be awarded in product liability cases? What rules and standards govern their calculation? Are damages capped?

General damages that flow from the defendant’s wrongdoing may be recovered, such as compensation for pain, suffering and emotional distress. The amount awarded is at the jury’s discretion, although the court can correct the amount if it is a clear abuse of that discretion.

Some states have capped general damages. Special damages that are specific to the plaintiff may also be recovered (eg, out-of-pocket expenses, loss of earnings and medical expenses). The amount is based on the expenses already incurred.

Moreover, a plaintiff may recover expenses that are likely to incur in the future (eg, future medical treatment or loss of employment opportunity). Such amount is calculated through the use of expert testimony and future projections.

Further, to limit the amount of damages awarded in a negligence claim, certain states have passed comparative negligence statutes where the amount of damages is reduced according to the plaintiff’s own negligence that contributed to the injury.

Are punitive damages allowed?

Punitive damages are generally available for certain product liability claims. Higher standards of proof are usually required to obtain a punitive damages judgment. Punitive damages are not available for all types of product liability claims and some states have capped the amount of punitive damages that may be awarded. Existing Supreme Court precedent suggests that the amount of punitive damages must be limited in relation to the compensatory damages awarded in the case.

Other remedies

Are any other remedies available?

Pre-judgment interest may be awarded in certain circumstances. Certain states allow a plaintiff to recover for aggravation of a pre-existing condition where the defendant inflicted a greater loss than would have been expected because of the pre-existing condition. Damages for injury to property other than the defective product are also recoverable, such as damage to homes or crops. In a breach of warranty claim, a plaintiff may recover consequential and incidental damages.

Product recalls

General requirements

Are there any statutory criteria under which a product must be recalled or other corrective action be taken?

The requirements of a recall depend on the federal agency overseeing the defective product at issue:

  • The Food and Drug Administration has jurisdiction over cosmetics, foods, drugs, medical devices and tobacco products – 21 CFR Section 7.40 provides general guidance on recall procedures.
  • The Consumer Product Safety Commission oversees consumer products used in homes, schools and recreation (eg, coffee makers, toys and lawnmowers) – 15 USC Section 2064 provides general guidance on recall procedures.
  • The National Highway Traffic Safety Administration regulates motor vehicles – 49 CFR Section 573.6 provides general guidance on recall procedures.

Generally, a company must contact the appropriate federal agency immediately and report the defective product. Together, the company and agency formulate a plan for recall.

Notification

What rules and procedures govern notification of the product recall to government authorities and the public?

The notification process depends on the federal agency involved. Generally, the company and the federal agency will issue a press or news release to alert the public of the defective product. If the company can identify the specific consumers who own the defective product, a notification letter will be sent directly to those individuals. A website, toll-free telephone number or email address must be established to respond to questions.

Repairs, replacements and refunds

What rules and procedures govern repairs, replacements and refunds for defective products?

It depends on the federal agency, though it generally requires the same procedures as the recall.

Non-compliance

What penalties apply for non-compliance with the legal provisions governing product recalls?

Depending on the federal agency, civil penalties of thousands or millions of dollars (according to the degree of the violation) and criminal penalties may apply.

The Era of the Internet of Things: Can Product Liability Laws Keep Up?

Leta Gorman | International Association of Defense Counsel

I. The Internet of Things Era

WE ARE living in an era that some refer to as the “Internet of Things” (“IoT”), where wireless connected devices know how we work, play, shop, sleep, drive, manage our homes, and medicate. IoT is a concept that represents the network of smart devices (or “things”) that are connected to the Internet and to each other and have the ability to collect and exchange data on every aspect of our lives and businesses.1 “Though there is no specific definition of IoT, the concept focuses on how computers, sensors, and objects interact with each other and collect information relating to their surroundings.”2 The connected devices operate on embedded sensors that automatically measure and transfer data (i.e., environmental and activity information) over a network to data stores without human interaction.3 These data stores interact with analytic engines to collect and provide data that can be acted upon.4

Among connected devices are devices that allow for the remote monitoring of babies and children; devices to help you to remember to take your medications; devices to track your activity levels; devices to help monitor an aging family member; medical devices that allow your health to be monitored by your doctor and that automatically release proper levels of medication; devices that allow you to remotely monitor your home; devices that allow you to turn off appliances or change the temperature in your home; devices that allow you to feed and water your plants and pets; and refrigerators that remind you when you are out of eggs. There are smart TVs and toys. There are devices that allow cities and governments to monitor trash pick-up, traffic flows, pollution levels, electricity usage, and the structural soundness of buildings and roads. There are devices that allow companies to monitor the repair and maintenance needs of equipment and track real time marketing trends in stores. This list of IoT devices is in no way complete, and it grows longer every day.

In 2009, the number of IoT devices surpassed the number of people,5 yet, the development and use of connected devices is really just in its infancy. By 2020, it is estimated that there could be 50 billion connected devices.6 By way of example, only 10% of consumer cars were connected to the Internet in 2009, but in 2020, 90% of consumer cars will be connected.7 “All of these connected machines mean much more data will be generated: globally, by 2018, mobile data traffic will exceed fifteen exabytes – about 15 quintillion bytes – each month. By comparison, according to one estimate, an exabyte of storage could contain 50,000 years’ worth of DVD-quality video.”8

Certainly, IoT devices can provide many benefits to consumers – convenience, home safety, medical monitoring, and reduced energy waste are a few examples. These benefits help explain IoT’s rapid growth. But, these devices create both security and privacy risks.

IoT devices can be hacked and controlled by third-parties. For example, imagine if the software system for the electronic thermostat in your home is hacked and turned off. Your home is damaged as a result of frozen pipes and/or water damage. Or, imagine if your home security system is hacked and disconnected. Your home is then vandalized and robbed.9 Or, what if your doctor’s medical monitoring equipment software is hacked? Your medical device doesn’t release the medicine you need to survive. Or, what if your implanted defibrillator has been reprogrammed by an unauthorized user?

There are also privacy risks related to IoT devices. The devices collect, transmit, and store consumer data, some of which is highly personal. If they are hacked, your private personal information could be shared, sold, and used. Private conversations could be exposed. Your private life is now no longer private.

Beyond these security and privacy risks, a device may also simply malfunction. A remotely operated device might fail and cause property damage such as fire or water damage. A home security device might leave doors or windows open, allowing intrusions or burglaries. Or, a medical device may fail to provide crucial medication to a patient or information to a doctor, causing serious injury or even death.

II. Can Product Liability Law Keep Up in the IoT Era?

If an IoT device is hacked and/or malfunctions, there will be new challenges with regard to product liability law. Traditional notions of product liability law provide that a product manufacturer, component part supplier, or seller (and others who make products available to the public) are to be held liable if they put a defective product into a consumer’s hands and the defect causes personal injury or property damage. A consumer can sometimes be liable for mishandling or misusing a product as well. Product liability claims are based on state laws and brought under negligence, strict liability, or breach of warranty theories.10 With an IoT device, however, these traditional notions will be challenged. What product liability law will look like in 2020 is an unknown. Today, unfortunately, there are more questions than answers.

For example, how are damages related to privacy issues to be compensated? What if there is a security breach and private information is obtained and even shared but not used. How do you quantify those damages? Damages related to privacy issues are intangible and hard to quantify. These types of damages also create legal questions of standing.

In addition, how do you allocate responsibility for damages? Does legal fault lie with the hacker, with the manufacturer, or with the owner who may have failed to properly secure the product (i.e., by using a sufficiently strong password or by timely updating the software)? If there is a software failure versus an actual defect in the product, should the maker of a product be held liable for the software failure? What if the manufacturer of the product or the software failed to include sufficient security designs? What about component part liability? Traditional product liability law holds that defective component part manufacturers can be held liable. Is software a component part?

Are there contracts between the software company and product manufacturer that allocate the risk of a potential hack and resulting damages between them? Are those contracts specific to the product and negotiated at arm’s length? Was the consumer compelled to sign a standard form agreement that automatically waived claims in order to use the software that accompanied the product?

What about insurance? Will traditional insurance policies, which generally cover losses that result in property damage or bodily injury resulting from a product defect, apply when an IoT product failure occurs? Will insurers begin to redesign their policies to provide specifically designed coverage to prevent any potential gaps in coverage?

At trial, what standards can be used to suggest an IoT’s alleged design, manufacturing, or other flaws fell below a minimum acceptable level? There are some developing standards relating to IoT but nothing that is considered universally acceptable. For example, the Institute of Electrical and Electronics Engineers (“IEEE”) has a “Standard for an Architectural Framework for the Internet of Things (IoT),”11 the International Organization for Standardization (“IOS”) and the International Electrotechnical Commission (“IEC”) have a family of standards for security management systems,12 and the International Telecommunications Unit (“ITU”) has an Internet of Things Global Standards Initiative.13 The United States Federal Trade Commission is taking a serious look at what kind of regulations are needed for personal and home devices that collect and transmit user data14 and, at the end of 2016, the U.S. Food and Drug Administration issued final guidance regarding the need for post market management of cybersecurity in medical devices.15 IoT is so broad and complex that no single standards organization has the possibility of being the one entity to pull it all together. How will liability be judged at trial if there is no minimum set of safety precautions or requirements?

If a product has vulnerabilities that allow it to be hacked, can a consumer allege the device was defective due to insufficient security controls or a failure of the manufacture to warn of dangers it knew of regarding the device’s configuration? And, has the consumer waived any rights regarding the software pursuant to any licensing agreement that was provided with the product?

Who has custody, ownership, and control over the data collected? Does the consumer own the data even though the data is maintained by someone else? Will there be chain of custody issues with regard to the data collected?

Software in connected devices will also impact discovery and investigation in IoT cases. There will be an added layer of complexity to any investigation with regard to what happened. In addition, the discovery process in IoT litigation could implicate privacy concerns. Plaintiffs may have to turn over the devices or tablets from which they operate a connected product that is the subject of the lawsuit. The devices may be helpful in determining if appropriate software updates occurred to allow the connected device to function properly or if a hack occurred. The information may help provide evidence of negligence on the part of the consumer or perhaps that of a hacker whose hack makes the product cause damage. Notwithstanding the arguable need for discovery of information on personal devices, plaintiffs may be reluctant to turn over devices that contain personal data.

Finally, even a small glitch in a network can impact hundreds or thousands or millions of products. This is a perfect formula for product liability no-injury class action litigation. Below, this article provides examples of cases that are already beginning to touch upon many of these issues.

III. IoT Device Cases

There have been cases involving IoT connected devices, but instead of litigating product liability issues, the issue of standing (lack of actual harm) is the prevalent theme in these cases.16

In Cahen v. Toyota Motor Corp.,17 Cahen filed an over 300-page national class action against Toyota, Ford, and General Motors. Cahen alleged, among other things, that these car manufacturers equipped their vehicles with computer technology that is vulnerable to hacking. Plaintiffs alleged that a hacker can communicate remotely (through Bluetooth or cellphone) with computers controlling many of the vehicles’ functions, resulting in a complete loss of driver control over steering, accelerating, and braking. Plaintiffs claimed that the manufacturers were aware of these security issues but nevertheless advertised their products as safe. As such, plaintiffs asserted that the auto companies breached, among other things, the implied warranty of merchantability and contract/ common law warranty and committed fraud.

The auto companies moved to dismiss on various grounds, including lack of standing. The defendants argued “plaintiffs do not allege any hacking incidents that have taken place outside of controlled settings, and that the entire threat rests on the speculative premise that a sophisticated third-party cyber- criminal may one day successfully hack one of plaintiffs’ vehicles.” Citing traditional automobile product liability cases, the court agreed with defendants, determining that the potential risk of future hacking was not an injury in fact. Nor was the court persuaded that standing could be supplied because of a “benefit of the bargain theory,” holding: “The plaintiffs have not, for example, alleged a demonstrable effect on the market for their specific vehicles based on documented recalls or declining Kelley Bluebook values.”18 The case was dismissed. Plaintiffs have appealed the dismissal to the Ninth Circuit, however.

In another suit against Chrysler Group,19 plaintiffs alleged that a security flaw in “infotainment” centers manufactured by co-defendant Harman International Industries was installed in certain vehicles. Plaintiffs alleged the “infotainment” center is “exceedingly hackable,” permits hackers to “remotely take control” of the steering, acceleration, and braking, and lacks the ability to quickly and effectively patch any software security flaws. The complaint alleges negligence, fraud, and breach of warranties.

Following defendants’ motion to dismiss on, among other grounds, the speculative nature of the damages, the court dismissed certain claims and trimmed others. According to the court, plaintiffs lacked standing to seek damages for the threat of future hacking. But, the court found plaintiffs did have standing to sue for damages for the diminished value of the car because “the ongoing vulnerabilities have reduced the market value of their vehicles.”20

Cardiac devices, such as pacemakers and defibrillators, were the subject of Ross v. St. Jude Medical Inc.21The devices at issue include an in-home monitoring system and use radio frequency wireless technology. The technology allows the implanted devices to be monitored remotely. The plaintiff filed a proposed class action alleging that the system lacked the “most basic security defenses.” The plaintiff was not physically injured in any way but he claimed that the devices could be disabled or their batteries drained if they are hacked. Plaintiff voluntarily dismissed the case, without prejudice, in December 2016.

In Baker v. ADT Corp.,22 plaintiff filed a class action alleging that ADT’s wireless security and monitoring equipment could be remotely turned on or off using technology accessible to the public. In addition, plaintiff claimed that third parties “can also hack into ADT’s wireless systems and use customers’ own security cameras to unknowingly spy on them.”

Plaintiff in Baker alleged that his system was hacked at least twice by an unauthorized third party, which “caused the system to be falsely triggered, which in turn caused ADT to contact Plaintiff and have the police called to Plaintiff’s home.”23 But rather than quantify any particular harm that flowed from those “false alarms,” plaintiff’s allegations focused instead on several of ADT’s marketing statements, including that ADT’s monitoring centers were “equipped with secure communication links.” His suit alleged violations of the Florida and Illinois consumer fraud statutes and claims for strict product liability and unjust enrichment.

Although the claims for strict product liability and unjust enrichment were ultimately dismissed, the case continues with consumer fraud claims based on the “secure communication links” representations in ADT’s advertising.

In re VTech Data Breach Litigation24 involved a manufacturer of children’s learning toys that link to certain web-based services. The complaint alleges that in November 2015, an overseas hacker illegally bypassed VTech’s security measures, obtained customer data, such as profile pictures, emails, passwords and nicknames, and provided the data to a journalist. The hacker was arrested shortly thereafter.

According to the complaint, the journalist who broke the story wrote: “[VTech] left thousands of pictures of parents and kids and a year’s worth of chat logs stored online in a way easily accessible to hackers.” The plaintiffs alleged, among other things, an increased risk of harm and diminished value of the products. They asserted claims for breach of contract, breach of the warranty of merchantability, and violations of state consumer protection laws.

In April 2016, the defendants filed a motion to dismiss alleging that the plaintiffs suffered no actual injury, as the plaintiffs did not plead that the data traveled beyond the hacker, the journalist, and a security analyst, and, as such, that plaintiffs lacked standing. The defense argued that there can be no liability for a hacker who neither intends nor accomplishes any harm beyond pointing out the vulnerability in the toy’s software system. The defendants’ motion to dismiss is still pending.

Another “connected” toy that resulted in litigation is “Hello Barbie.”25 Plaintiffs alleged negligence, unfair competition, and privacy violations against the doll’s manufacturer, Mattel Inc., and ToyTalk Inc., which managed the toy’s online technology. Plaintiffs alleged the doll was designed to engage in conversation with a child, record each conversation, and collect and store the recordings in the cloud. The complaint alleged that security issues had been discovered, including a vulnerability through which a hacker could “impersonate a doll in order to lure an unsuspecting user into connecting to and supply[ing] user information to an impersonated doll.” There was no allegation of actual malicious hacking of the accounts or misuse of the information in the manner identified that caused direct harm to plaintiffs.

The defendants removed to federal court26 and filed motions to dismiss based on standing and other grounds, and also moved to compel arbitration. The court never ruled on the motions because plaintiffs agreed to dismiss the case with prejudice.

IV. Conclusion

Given the predictions regarding the number of IoT devices expected to exist in 2020 and the amount of data traffic expected to be created, the number of consumer claims will only continue to grow. Traditional product liability theories will need to be examined and re-examined in this new era. The IoT has not only changed and will continue to change the way we live … it will change how we think about security, privacy, and traditional notions of product liability law. In time, we will learn if product liability laws can keep up.

  1.  http://www.ftc.gov/system/files/documents/reports/federal-trade-commission-staff-report-november-2013-work%20shop-entitled-internet-things-privacy%20/150127iotrpt.pdf (last visited May 11, 2017) (hereinafter “FTC Staff Report”).
  2. Antigone Peyton, A Litigator’s Guide to the Internet of Things, 22 RICH. J.L. & TECH. 9 at 1 (2016), available at http://jolt. richmond.edu/2016/04/01/a-litigators-guide-to-the-internet-of-things/(last visited May 11, 2017).
  3. See Embedded Intelligence – Connecting Billions of Smart Sensors into the Internet of Things, Arm Holdings, available at https://perma.cc/3HWX-QBWW (last visited May 11, 2017); see also Daniel Burrus, The Internet of Things is Far Bigger Than Anyone Realizes, https://www.wired. com/insights/2014/11/the-internet-of-things-bigger (last visited May 11, 2017).
  4. Burrus, supra note 3.
  5. See Dave Evans, The Internet of Things: How the Next Evolution of The Internet is Changing Everything at 3, Cisco Internet Bus. Solutions Grp. (April 2011), available at https://perma.cc/HDF9-NM6T. These are estimates for all types of connected devices, not just consumer market devices.
  6. Id. IDC’s Digital Universe study reports that by 2020, there will be 200 to 300 billion connected IoT objects. See, The Digital Universe of Opportunities: Rich Data and the Increasing Value of the Internet of Things, EMC2 (April 2014), available at https://perma.cc/86RJ-786G; see also Data Set to Grow 10-fold by 2020 as Internet of Things Takes Off, Computerweekly.com (April 2014), http://www.computer weekly.com/news/2240217788/Data-set-to-grow-10-fold-by-2020-as-internet-of-things-takes-off, archived at https://perma. cc/KGW9-K7DF.
  7. Connected Car Industry Report 2013, Telefonica at 9 (2013), available at http://websrvc.net/2013/telefonica/Telefonica%20Digital_Connected_Car2013_Full_Report_English.pdf.
  8. See, e.g. FTC Staff Report, supra note 1, at 2, citing to CISCO, Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2013–2018 at 3 (2014), available at http://www.cisco.com/c/en/us/solutions/collateral/service-provider/visual-networking-indexvni/white_paper_c11-520862.pdf and University of Bristol, Exabyte Informatics, available at http://www.bris.ac.uk/research/themes/exabyteinformatics.html.
  9. See, e.g., Julie Jacobson, Quirky ‘Terribly Embarrassed’ Over Wink Home Automation Hub Recall (Updated) CE Pro (April, 20, 2015), http://www.cepro.com/article/quirky_terribly_embarrassed_over_wink_home_automation_hub_recall#.
  10. See generally RESTATEMENT (THIRD) OF TORTS: PRODUCT LIABILITY §§ 1-2 (1998).
  11. IEEE Standards Association, P2413 – Standard for an Architectural Framework for the Internet of Things (IoT), available at https://standards.ieee.org/develop/project/2413.html.
  12. ISO/IEC 27000 family – Information security management systems, available at https://www.iso.org/isoiec-27001-information-security.html.
  13. ITU Internet of Things Global Standards Initiative, available at http://www.itu.int/ en/ITU-T/gsi/iot/ Pages/default.aspx.
  14. See, e.g., FTC Staff Report, supra note 1, at 1.
  15. Postmarket Management of Cybersecurity in Medical Devices: Guidance for Industry and Food and Drug Administration Staff, U.S. Food & Drug Administration, December 28, 2016, available at https://www. fda.gov/downloads/medicaldevices/deviceregulationandguidance/guidancedocuments/ucm482022.pdf.
  16. “Actual or imminent” injury—not just “conjectural or hypothetical” harm— is the “irreducible minimum” of all lawsuits under the Constitution. Lujan v. Defenders of Wildlife, 504 U.S. 555 (1992). (Scalia, J.) “No principle is more fundamental to the judiciary’s proper role in our system of government.” DaimlerChrysler Corp. v. Cuno, 547 U.S. 332, 341 (2006) (Ginsburg, J.).
  17. 3:15-cv-01104 (N.D. Cal. March 10, 2015).
  18. Cahen v. Toyota Motor Corp., 147 F. Supp.3d 955, 971 (N.D. Cal. 2015).
  19. Flynn v. FCA US LLC, 3:15-cv-855 (S.D. Ill. Aug. 4, 2015).
  20. Id. at 9.
  21. No. 2:16-cv-06465 (C.D. Cal. Aug. 26, 2016).
  22. No. 2:15-cv-02038 (C.D. Ill. Nov. 9, 2014).
  23. Id.
  24. No. 1:15-CV-10889 (N.D. Ill. Dec. 3, 2015).
  25. See Archer-Hayes v. ToyTalk, Inc., No. BC603467, 2015 WL 8304161 (Cal. Super. Dec. 7, 2015).
  26. Id.

Trendy Building Material May Cause Future Problems

J. Spencer Cook and Bryan G. Scott | Spilman Thomas & Battle | November 30, 2017

We all remember the litigation nightmare surrounding synthetic stucco or EIFS (exterior insulation finish systems) in the recent past. Now, commentators worry that Adhered Concrete Masonry Veneer, also known as manufactured stone veneer (pictured below), when installed improperly, poses the potential to cause widespread litigation similar to EIFS.

In case you do not recall, EIFS became a popular exterior on residential structures in America during the 1980s. However, in the mid-1990s, home inspectors noticed some EIFS-clad homes experienced significant amounts of moisture damage, particularly those on the coast of North and South Carolina. News and media outlets began to widely publicize extensive litigation over EIFS-clad homes.

With the cloud surrounding EIFS, builders shifted to other exterior building materials to provide an upscale and appealing appearance on buildings. Manufactured stone veneer in recent years has seen a dramatic rise in use on residential and commercial buildings because, like EIFS, it enhances a building’s aesthetics by giving it an upscale, trendy, and modern look that many builders and owners seek. Notably, Remodeling Magazine recently published a report noting that adding manufactured stone veneer holds the third best ratio for cost to value received on home remodeling projects. Given these attributes, manufactured stone veneer appears positioned to continue to rise in popularity.

Manufactured stone veneer is a fabricated alternative to using natural stone on either the exterior or interior of homes and is composed of cement, natural aggregate, and iron pigments that are molded into natural-looking stone shapes using molds of natural stones. Manufacturers create manufactured stone veneer to be a lighter weight material than natural stone. Therefore, using manufactured stone veneer is preferable to natural stone because it is less stressful on foundations and does not require additional strengthening of walls or foundations.

Despite manufactured stone veneer’s increase in popularity, some home inspectors worry it will be prone to the same moisture damage risks as EIFS if it is improperly installed. Because manufactured stone veneer is applied in a similar manner as EIFS, improper installation potentially can cause water to infiltrate the veneer. Proper installation of manufactured stone veneer requires implementation of adequate installation protocols to prevent the moisture from becoming trapped behind the stone veneer. Otherwise, a structure will be at risk for mold, rot and other moisture-related structural damage. Proper manufactured stone veneer installation may often require builders to implement additional drainage measures to limit water infiltration. Additionally, manufactured stone veneer is prone to cracking from improper mortar or sealant materials utilized during installation. Any cracking may exacerbate water infiltration and moisture damage issues.

Despite these concerns, manufactured stone is an upscale and value-adding material that, when properly installed, is an effective exterior building material. The Masonry Veneer Manufacturers Association has published an installation guide for the installation of manufactured stone veneer on buildings. Contractors and owners should take care to ensure manufactured stone veneer installed on their projects complies with all manufacturer’s installation requirements, and also meets applicable building codes and industry guidelines.