Business torts and product liability

Some torts are aimed at business interests rather than bodies or property: lies that destroy a company's reputation, imitations that confuse customers, interference with contracts and the misuse of confidential information. Other torts arise from the products a business makes and sells. This lesson covers the torts that protect reputation, relationships and goodwill, and the law of product liability, which is one of the largest sources of business litigation. Intellectual property statutes, which protect many of the same interests, are introduced in lesson 12, and consumer protection and privacy legislation in lesson 11.

Deceit

Deceit, also called fraud or fraudulent misrepresentation, is a false statement of fact made knowingly, without belief in its truth or recklessly, intending the other party to rely on it, which causes loss when that party does rely. It overlaps with contract law (lesson 4): a party induced to contract by fraud can rescind the contract and claim damages in tort. Deceit also arises outside contracts, for example when a seller of a business inflates its revenues to a prospective buyer. Because it involves dishonesty, courts can award punitive damages, and individuals who personally made the fraudulent statements are liable even if they acted for a corporation.

Defamation and injurious falsehood

Defamation protects reputation. A statement is defamatory if it would tend to lower a person's reputation in the eyes of a reasonable person. The plaintiff must show that the words referred to it and were published, meaning communicated to at least one person other than the plaintiff. Defamation in permanent form, such as print, online posts and broadcasts, is traditionally called libel; spoken defamation is slander. Corporations can sue for defamation that harms their business reputation. Every person who repeats a defamatory statement is a publisher and can be liable, which matters for businesses that share or repost content.

American defamation law is shaped by the First Amendment. In New York Times Co. v. Sullivan (1964), the Supreme Court held that a public official cannot recover for defamation about official conduct unless the statement was made with actual malice, meaning knowledge of falsity or reckless disregard for the truth, and later cases extended this to public figures. Private plaintiffs must usually show at least negligence, and the plaintiff generally bears the burden of proving falsity on matters of public concern. Statements of pure opinion that cannot be proved true or false are protected, though calling something opinion does not protect an implied false statement of fact. Truth is a complete defense, and privileges protect statements in judicial proceedings and some reports. More than thirty states have anti-SLAPP statutes that allow early dismissal of suits targeting speech on public issues and often award attorney's fees to successful defendants. Under Section 230 of the Communications Decency Act, online platforms are generally not liable as publishers for content posted by users, although the users themselves are.

Injurious falsehood, also called trade libel or product disparagement, protects economic interests rather than reputation. It covers false statements about a business's products, services or title to property, made maliciously or with knowledge of falsity, that cause economic loss. A competitor that falsely claims a rival's product contains harmful chemicals commits injurious falsehood and may also breach false advertising laws (lesson 11). Unlike defamation, the plaintiff must prove falsity, malice and actual economic loss.

Interference with contracts and economic relations

Tortious interference with contract occurs when a defendant, knowing of a valid contract between the plaintiff and a third party, intentionally and improperly induces or causes the third party to breach it, causing damage. Tortious interference with prospective economic advantage protects expected business relationships that have not yet become contracts; most states require the defendant to have used independently wrongful means, such as fraud, defamation or threats, because competing for customers is otherwise lawful. Hiring a competitor's employee who is free to leave is not a tort, but inducing an employee to breach a valid non-solicitation agreement or to bring trade secrets can be. In one of the most famous examples, Texaco was ordered in 1985 to pay more than $10 billion for interfering with Pennzoil's agreement to acquire Getty Oil, although the parties later settled for $3 billion.

Passing off and unfair competition

Section 43(a) of the federal Lanham Act creates a civil action against any person who uses a word, symbol, device or false designation of origin that is likely to cause confusion about the source, sponsorship or approval of goods or services, which protects unregistered trademarks and trade dress, and against false or misleading commercial advertising. State unfair competition laws and the common law tort of passing off provide similar protection. Registering a trademark with the United States Patent and Trademark Office (USPTO) gives nationwide constructive notice and stronger remedies (lesson 12), but section 43(a) protects unregistered marks and distinctive product packaging too.

Confidential information and trade secrets

Trade secrets are protected by the Uniform Trade Secrets Act, adopted in 49 states (New York relies on common law), and by the federal Defend Trade Secrets Act of 2016, which lets owners sue in federal court and, in extraordinary cases, obtain an ex parte order seizing property to prevent dissemination. A trade secret is information that derives independent economic value from not being generally known and is the subject of reasonable efforts to keep it secret. Misappropriation means acquiring a secret by improper means, such as theft or breach of a duty of confidentiality, or using or disclosing it without consent. Reverse engineering and independent discovery are not misappropriation. The Economic Espionage Act makes trade secret theft a federal crime. Practical protection depends on non-disclosure agreements, access controls and marking documents confidential.

Product liability

Product liability covers injuries and losses caused by defective products. Claims may be brought in contract, against the seller under sale of goods warranties (lesson 5), and in tort, against anyone in the chain of distribution: the manufacturer, component suppliers, distributors and retailers. Product defects fall into three categories. A manufacturing defect is a flaw in a particular unit that departs from the intended design, such as a contaminated batch of food. A design defect affects every unit because the design itself is unreasonably dangerous. A warning or instruction defect exists when a product lacks adequate warnings about risks or instructions for safe use.

American product liability law is largely strict liability in tort. In Greenman v. Yuba Power Products (1963), the California Supreme Court held a manufacturer strictly liable when a defective power tool injured a user, and Restatement (Second) of Torts section 402A made the rule nationwide: anyone in the business of selling a product in a defective condition unreasonably dangerous to the user is liable for resulting physical harm, even if it exercised all possible care, and even without a contract with the injured person. Manufacturing defects are judged strictly. For design defects, most courts now apply a risk-utility test, and the Restatement (Third) of Torts: Products Liability requires the plaintiff to show a reasonable alternative design that would have reduced the foreseeable risks; some states also use a consumer expectations test. A product also has a warning defect if it lacks warnings of foreseeable risks that are not obvious. Retailers and distributors can be strictly liable too, although many states let innocent sellers pass liability to the manufacturer. Plaintiffs can also sue in negligence and for breach of warranty.

Defenses include product misuse that was not reasonably foreseeable, alteration of the product after sale, comparative fault, assumption of a known risk, the state-of-the-art defense in some states (the product reflected the best available technology when made), statutes of limitations and repose, and federal preemption in regulated areas, for example for certain medical devices that received premarket approval from the Food and Drug Administration. Product liability cases often proceed as class actions or are consolidated in federal multidistrict litigation (MDL), which can involve thousands of claims against a single manufacturer.

Product safety regulation and recalls

The Consumer Product Safety Commission (CPSC) regulates most consumer products under the Consumer Product Safety Act. Section 15(b) requires manufacturers, importers, distributors and retailers to report to the CPSC within 24 hours once they obtain information reasonably supporting the conclusion that a product contains a defect that could create a substantial product hazard, creates an unreasonable risk of serious injury or death or fails to comply with a safety rule. Late reporting has led to civil penalties of many millions of dollars. The CPSC can negotiate voluntary recalls or seek mandatory ones. Food, drugs and medical devices are regulated by the Food and Drug Administration, vehicles by the National Highway Traffic Safety Administration and many workplace products by OSHA.