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CHAPTER 7
BUSINESS TORTS AND PRODUCT LIABILITY
TORT LAW AND BUSINESS—While businesses can be involved in all forms of torts, there
are some that are peculiar to business, usually involving business practices that have crossed the
bounds of acceptable behavior. These torts may be intentional torts (willful misconduct) or may
be based on negligence (legal carelessness). In this chapter we focus on torts that are peculiar to
business.
Fraud—This tort also may be called fraudulent misrepresentation or deceit. It involves
deliberate deception; in business it usually also involves breach of contract. It may be an
intentional tort or one based on negligence. This claim is common in breach suits as it may open
the door to greater damages, especially punitive damages, than are available under contract law.
Intentional Misrepresentation or Fraud—Occurs when the deceit is done knowingly and meets
the elements of fraud: material misrepresentation; scienter; intent to induce reliance; justifiable
reliance by plaintiff; legal relationship between parties; causation; and damages.
CASE: Lightle v. Real Estate Commission (Sup. Ct., Alaska, 2006)—Lightle was a real estate
agent who listed a house for sale by the Leighs. The Williams made an offer to buy conditional
on a mortgage, which the Leighs accepted. Another realtor brought Seeley to see the house;
Lightle told her she could have it as the Williams’ offer was dead. Unknown to Seeley her offer
was written as a back up to the Williams’ offer. Seeley planned to move but found out the truth
about the status of the house. She filed a claim with the Alaska Real Estate Commission, which
compensates people in cases of real estate fraud. The Commission held Lightle committed
fraudulent misrepresentation, suspended him, and awarded Seeley damages. The superior court
affirmed. Lightle appealed.
Decision: Affirmed. Fraudulent misrepresentation means: misrepresentation of fact, made
Questions: 1. The court held that Lightle committed fraud by not telling the truth about the
contract status of the house. Did he intend to deceive the buyer?
That is what the Commission and the court found. He thought the first deal may fall through, so
he wanted another deal ready to go. He intended to deceive the buyer by presenting information
2. Since Lightle was the representative of the sellers, the Leighs, why should he have any
obligation to the buyer, Seeley?
Any party to the making of a contract has an obligation not to deceive the other party. Lightle, as
an agent of the Leighs, spoke for them in negotiations. For him to lie would be the same as the
Add. Case: Robinson Helicopter Co. v. Dana Corp. (Sup. Ct., Calif., 2004)—Robinson makes
helicopters using clutches made by Dana. Aircraft makers must have FAA certificates that set the
design of aircraft as of the date of certificate. The copters required a specific clutch from Dana.
Robinson had bought thousands of clutches from Dana and had a failure rate of 0.03%. Dana
changed its manufacturing process. It did not tell Robinson or the FAA. Dana continued to
provide certificates for the clutch under the previous production method. Unaware of the change,
Robinson used about a thousand of the new clutches, which had a failure rate of 9.86%. There
were no crashes, but customers were not pleased. The FAA required Robinson to recall all
copters made with the newer clutch and install the older, superior model. The expense was over
$1.5 million. Robinson sued. The jury awarded $1.5 million compensatory damages and $6
million punitive damages. Dana appealed. The appeals court held that Robinson could not
collect punitive damages. It appealed.
Decision: Reversed. The economic loss rule provides that where a buyer’s expectations in a sale
are frustrated because the product is not working properly, the remedy is in contract alone, and
not in tort, because only economic losses have occurred. However, the tort of fraud goes beyond
Interference with Contractual Relations—An intentional tort that occurs when one knows
about a contract between other parties and interferes in that relationship. There must 1) exist a
contractual relationship between the injured business and a third party; 2) this must be known to
the wrongdoer; and 3) the wrongdoer must intentionally interfere with the relationship. The
action for breach of contract is against the party to the contract; the tort action is against the party
who induced the breach or prevented the contract from coming into existence.
CASE: Slater Numismatics v. Driving Force (Ct. App., CO, 2012)—Slater, a rare coin dealer,
worked with ICG to grade and ship coins to Cable Shopping. Two employees left ICG and set up
Driving Force, which hired away most of ICG’s key employees, effectively putting it out of
business. Knowing the terms of the deal with Cable, it offered it a better deal and got the
business taken away from Slater, who sued for intentional interference with contractual relations.
Trial court held for Driving Force; Slater appealed.
Decision: Reversed. A jury could conclude that Driving Force’s actions would make IGC unable
Questions: 1. Why is the behavior of defendant not allowed as fair competition?
The common law sees this as cheating and undermining the ability to rely upon fair competition
2.Cable Shopping was happy to move its business to ANACS. Should it be liable to Slater for
damages?
If Cable Shopping broke a contract, then it could be liable for breach of contract (but the case
Add Case: ASC Construction Equipment USA v. City Commercial Real Estate (Ct. App.,
Ga., 2010)—ASC hired City as its agent to find land for two Volvo showrooms. City found
property and received a commission. City then called for construction proposals. The contractors
promised to pay City a commission if one got the job. One bidder, Seefried, got help on the bid
from Catamount. ASC later decided to handle the construction without City and told it to quit
looking for a contractor. ASC hired Catamount, a contractor City had talked to, but did not have
a commission agreement with, for the job. City sued ASC for tortious interference with business
relations. The jury awarded compensatory and punitive damages. ASC appealed.
Decision: ASC did not know of any relationship between City and Catamount. Catamount
provided background support for Seefried, which did have an agreement with City. Hence, there
Add. Case: Wilspec Technologies, Inc. v. DunAn Holding Group Co. (Sup.Ct., Ok., 2009)—
Wilspec and DunAn both design, produce, and sell parts for air conditioning (AC) units. Wilspec
entered into a three-year contract with DunAn, a Chinese company, for DunAn make parts for
AC units sold in North America. The DunAn parts were to be sold under the Wilspec name, and
Wilspec would be the exclusive distributor for the products in North America. Wilspec made
parts for several AC manufacturers. Wilspec claimed that DunAn intentionally interfered with
Wilspec’s contractual relations with its AC customers by soliciting sales to Wilspec’s customers
and by making disparaging remarks about Wilspec’s ability to perform. Wilspec sued DunAn in
federal court. The contract was under Oklahoma law. The federal court certified questions to the
Oklahoma high court about the law in Oklahoma regarding intentional interference with a
contract.
Decision: Questions answered. In Oklahoma, one who intentionally and improperly interferes
with performance of a contract between another and a third party, by preventing the other from
Add. Case: Matrix Group Limited v. Rawlings Sporting Goods (8th Cir., 2007)—Matrix made
bags for Rawlings. It had an exclusive license to use Rawlings’ trademark on sports bags and the
parties agreed not to compete with each other. K2 bought Rawlings and decided to make bags
itself and terminated the agreement with Matrix. Matrix sued Rawlings for breach of contract
and sued K2 for tortious interference with a business relat6ionship. The jury awarded $6.65
million in damages. K2 appealed.
Decision: Affirmed. There was a business relationship between Matrix and Rawlings. K2 knew of
Add. Case: Seminole Tribe of Florida v. Times Publishing (Ct. App., Fla., 2001)--The St.
Petersburg Times published a series of stories about business interests of the Seminole Tribe
implying mismanagement and self-dealing. The reporters got access to documents via
employees. The Tribe sued the paper for interference with business relationships between the
Tribe and its employees and other parties. The case was dismissed; the Tribe appealed.
Decision: Affirmed. There was no tort because the defendant did not interfere in a business
relationship in an effort to cause a breach of contract. Some employees may have been disloyal
Add. Case: Robi v. Five Platters (9th Cir., 1990)--Robi, a member of The Platters in the 1950s,
found it hard to perform under the name “The Platters” after he left the group sponsored by the
Five Platters, Inc. (FPI) because the owner threatened to sue anyone who hired him (and other
former group members) if advertised as The Platters. Parties had been threatened with lawsuits
if they did business with Robi advertised in any way with the name The Platters. Robi sued.
Decision: Robi was awarded $1.5 compensatory damages and $2 million punitive damages
because FPI knew there were valid contracts, intended to induce breaches, caused breaches to
Interference with Prospective Advantage—The intentional tort of interference with
prospective advantage is also called interference with prospective economic advantage or with
prospective contractual relationships. This is interference with another’s business in an
unreasonable manner; predatory behavior to destroy a business relationship.
CASE: Gieseke v. IDCA (Ct. App., MN, 2013)—Brothers Michael Hogenson (MH) and Arthur
Hogenson (AH) owed Standard Water. They got into a dispute and quit working together. MH
kept Standard and fired Gieseke because he was friendly with AH. Those two then started
Diversified Water. Later, MH bought AH’s half of Diversified with the intent of closing it down
by folding into IDCA. MH changed company materials and moved equipment without Gieseke’s
permission, making it very hard for Gieseke to keep working, so he sued for interference with
prospective advantage. District court awarded $220,000 in damages; IDCA (MH) appealed.
Decision: Affirmed. The tort action here concerns interferences with “any prospective contractual
Questions: 1. IDCA was part owner of Diversified Water. Did that not give it the right to shut
down Diversified?
No, a part owner, even a 50% owner, has no right to make it impossible for the other owner to try
to earn a living from the business. That is not treating the business in a business-like manner. If
2. Why do you think MH would go to all the trouble he did with respect to Diversified
Water?
Brotherly hatred can run deep. The actions taken here went beyond any business sense; this
Add. Case: MDM Group Assoc. v, CX Reinsurance Co. (Ct. App., Colo., 2007)—MDM, an
insurance broker, sold policies to ski resorts to cover losses in the event of too few snow days.
CX provided policies and MDM got commissions. Due to low snow, CX got buried in claims and
quit writing policies. MDM sued CX for interference with prospective business relations by
handling the claims poorly and not writing new policies. The jury awarded $6.75 million in
damages, MDM appealed.
Decision: Reversed. A defendant cannot be liable for the tort of interference with its own
Add. Case: Advanced Global Technology v. Sirius (Sup. Ct., N.Y., 2007)--Sirius operates a
satellite radio service and makes receivers for its transmissions. It authorizes some third parties
to make and sell receivers under the Sirius brand name. The company KRI is the largest maker
of its receivers. Sirius is KRI’s largest revenue source. The receivers made by its competitor XM
are not compatible. AGT makes receivers for XM. AGT began discussions about having KRI
develop a HD (high definition) radio receiver. KRI broke off discussions and told AGT that Sirius
was not happy about KRI working with AGT. AGT then sued Sirius for interference with a
prospective business advantage. AGT claims that it would have earned profits from a
relationship with KRI that would get AGT into the HD radio market.
Decision: Complaint dismissed. To show a tort, AGT must show 1) a business relation with a
third party (KRI), 2) interference with those business relations by Sirius, 3) that Sirius was
Add. Case: Pleas v. City of Seattle (Sup. Ct., Wash., 1989)--A company was set to build an
apartment building in Seattle and met zoning regulations. Neighbors opposed the construction
and pressured the city not to allow it. After a ten year fight, the builder was allowed to build. He
sued for lost profits, higher costs, attorney fees, and other costs associated with the political
fight. Trial court awarded $970,000. Court of appeals reversed. Builder appealed.
Decision: Reversed. As in other states, a wrongful interference with economic relationships can
arise in different ways. It may be the wrongful use of a statute or regulation that was intentional.
Add. Case: Monette v. AM-7-7 Baking (6th Cir., 1991)--Monette, an independent bread
deliverer bought a bread delivery route. The bakery that sold him most of his bread appeared to
cooperate, but undercut him by getting his customer list by having an employee ride the delivery
route with him under the pretext of helping him with customer relations. The baker then sent its
own truck out on the route to sell its products to Monette’s customers and refused to sell bread to
him, putting him out of business. Trial court awarded Monette $60,000. Defendant appealed.
Decision: There was a valid business relationship, defendant knew of the relationship, defendant
intentionally caused the termination of the relationship, and that improper interference resulted
Add. Case: Georgetown Manor v. Ethan Allen (11th Cir., 1995)--Georgetown (G) ran stores in
Florida where it sold Ethan Allen (EA) furniture. After a dispute, G told EA that it was
converting its stores to be outlets for Thomasville Furniture. EA placed ads in Florida papers
stating that it quit selling furniture to Georgetown because it was not current on its debts to EA.
It stated that EA was opening new stores and would fill orders for their furniture immediately. G
sued, claiming the ad interfered with customers who had orders with it for EA furniture by
causing them to cancel orders and demand refunds; G claimed the ad interfered with its
prospective relationship with 89,000 people who had shopped there in the past and might again.
The jury found EA had maliciously interfered with G’s business relationships and awarded
$285,000 for lost profits on existing furniture contracts and $7.4 million for loss of business,
including goodwill. EA appealed.
Decision: Under Florida law, G could recover for damages flowing from interference with
existing business relationships (the $285,000); but there could be no recovery for interference
Issue Spotter: Hiring Employees from Competitors
The strategy is ok, but should be done carefully. In one case, a company hired 15 managers from
a competitor in one swoop (and they then recruited the workers they liked best). A jury awarded
$21.5 million for unlawful interference with business expectancies. The jury also found theft of
trade secrets, but that was knocked out by the judge and appeals court. It was clear the company
had a business strategy to damage their competitor in this manner. So while hiring is fair game,
probably best to hire from various companies, not give the appearance of trying a knockout blow
against one in particular. And be careful that they do not walk out the door with any documents
from their company.
PRODUCT LIABILITY—Product liability suits frighten most companies; stories of massive
awards have led to the push for tort reform and caps on damages. As we will see, the law in this
area has changed substantially over the past century as the law adapts to changes in the social
environment.
Add. Disc.: Responses to consumer claims: Action taken by companies when a problem occurs
can reduce potential liability. Schwan’s ice cream was linked to 500 cases of salmonella
poisoning due to improper food handling; the company contacted all victims and offered to help;
apparently no suits were filed. That contrasts with McDonald’s decision to fight an 81-year-old
woman’s request for medical care costs due to hot coffee spill. The jury, which had been
skeptical initially, discovered that McDonald’s coffee was hotter than most and there had been
hundreds of burn cases settled out of court; the company appeared to be insensitive in this case,
where the burns required hospitalization, so the jury socked it with $2.7 million punitive
damages (reduced 75% by the judge).
Consumer Products and Negligence—Negligence by consumer product producers has long
been the basis of liability, originating in contract law.
Rule of Caveat Emptor—When liability for defective products is rooted in contract law, privity
of contract between seller and injured party had to be shown, which was difficult, so buyers had
to beware. The rule of liability was negligence, but a contractual relationship had to exist. Selling
a product down the chain of distribution could break the relationship between the producer and
the consumer.
Negligence in Tort—For consumer injuries, privity of contract was eliminated by going to
negligence in tort early in the 20th century. Manufacturers held responsible to consumers. Privity
requirement eliminated.
CASE: MacPherson v. Buick Motor Co. (Ct. App., NY, 1916)—Buick sold new car to dealer
who sold it to MacPherson. Defective wheel broke while MacPherson was driving, causing him
to be injured in an accident. Under the traditional rule, MacPherson only had privity of contract
with the car dealer, who was not responsible for the defect, so he could not recover for damages.
Decision: Justice Cardozo established that New York eliminated privity in contract by placing
injury from defective products under tort law. If a producer could be shown to have been
Questions: 1. Buick argued that it should not be liable because it did not make the wheels--some
other company did. Why not make the injured party sue the producer of the defective part?
The producer of a defective part used in the construction of a product may very well be liable to
the injured party. However, the injured party does not have to inquire as to who the part producer
was. Injured parties sue the producer of the product, who is responsible for placing the defective
2. Buick argued that this was the only wheel out of 60,000 sold that had been shown defective.
Should 1/60,000 be sufficient to establish negligence?
Whether or not 1/60,000 tires should be sufficient to establish liability on the part of a producer
depends upon the type of product involved and the state of the art in the production of such
products. Defective automobile wheels could be expected to lead to death or serious injury.
Note: The negligence standard is still good law; many strict liability cases also include a
negligence claim. Any producer who does not take reasonable care in producing products will be
held liable for injuries caused by such failure—which may include failure to test adequately or
may arise from misrepresentations to the public about the attributes of the product. A finding of
negligence in a product defect case is a strong win.
Add. Case: Perlmutter v. U.S. Gypsum (10th Cir., 1995)--Plaintiffs built a shopping mall in
1967; defendants provided plaster containing asbestos that was used in the ceiling. A deal to sell
the mall in 1987 fell through when the buyer discovered the asbestos and feared liability.
Plaintiffs removed the plaster for $1.75 million and sold the mall. They sued to recover the cost
of the removal under strict liability and negligence. The jury found no strict liability, but found
for plaintiffs based on negligence. The judge granted summary judgment for defendant because
plaintiffs could not “prove an essential element of the negligence claim—that [the plaster]
created an unreasonable risk of harm as it was applied in the mall in 1967.” That is, the plaster
was not shown to be defective.
Decision: Affirmed. The jury found, on the strict liability claim, that the product “was not a
defective, unreasonably dangerous product when sold,” therefore, the product could not be
Note on crashworthiness: One area in which the negligence standard predominates is the
crash-worthiness of vehicles; the makers cannot be held strictly liable for injuries in car
accidents, but they have a duty to minimize foreseeable dangers to vehicle occupants since they
know there will be accidents. This can even apply to lawn mowers.
Add. Case: Tafoya v. Sears Roebuck (10th Cir., 1989--Tafoya was mowing when he cut too close
to a steep hill, the mower tipped over and rolled down the hill. He suffered injuries that he held
were due to defective design, which made the mower not crashworthy.
Decision: Court of Appeals affirmed the jury verdict of 50-50 allocation of fault between Tafoya
and Sears. The mower could have had a “deadman” device that stops the blades when the
Add. Case: Satcher v. Honda (5th Cir., 1995)--Satcher lost a leg in a collision between his
motorcycle and a car. His Honda had no leg guards (none did), which he claims made the
product unreasonably dangerous in a crash. A jury awarded $1 million in damages and $2
million in punitive damages. On appeal, the 5th circuit reversed. The alleged defect, the lack of
leg guards, was open and obvious to the consumer. The Mississippi high court then changed the
law that would apply to the case. The court approved a risk-utility analysis rather than a
consumer expectations analysis. Under the risk-utility rule, even if the dangers of a product are
obvious to a reasonable consumer, the plaintiff may still recover in some cases. The case was
returned to district court, which reinstated the verdict for plaintiff. Honda appealed again.
Decision: The punitive damages were tossed out; under Mississippi law, there must be gross
negligence for punitive damages; that was not present here. There is dispute as to the value of
leg guards. The compensatory damages were allowed to stand; it is within the jury’s discretion to
Add. Disc.: In some states, the enhanced injury doctrine extends the crashworthiness doctrine.
Was an injury made worse than it need have been? For example, the Supreme Court of Iowa
held in a case that injuries were enhanced because a corn picking machine did not have a power
switch that was easy to reach. When a farmer stuck his hand in the machine to clear some corn
husks, he was unable to reach to shut off the machine because his hand was stuck and, then,
ripped off. The court found that such a switch was cheap and that since the makers knew farmers
often pulled out stuff clogging the machine without shutting the machine down, this was a design
defect responsible for enhanced injury.
International Perspectives: Is Japan Really Different?
Despite the common assertions that there are few lawyers and little litigation in Japan, which is
supposed to make the country more competitive relative to the U.S., a closer look indicates some
Strict Liability under Contract Law—Developed slowly during 20th century. It developed
before strict liability in tort for products. Link was to implied warranty of safety for products for
which consumers could not be expected to protect themselves, such as tainted food, drink, or
drugs. Liability is also based on express warranty when producers promised safety that was not
delivered or was deceptive (misrepresentation).
Add. Case (warranties in general): Nichols v. R.R. Beaufort (Sup. Ct., R.I., 1999)--Beaufort
built a home in 1983. Two years later, the original buyer sold the home to the Nichols. In 1988
the garage floor caved in. In 1991 there were cracks in the walls of the kitchen and garage. An
engineering firm reported that the home was built on unstable soil. Nichols sued Beaufort for
breach of implied warranties and negligence in construction. Trial court dismissed, holding that
there was no privity of contract between the parties. Nichols appealed.
Decision: Reversed in part. Privity was unnecessary for a suit by subsequent buyers of a home
against the builder for breach of implied warranty of good workmanship for latent defects. It
Issue Spotter: Understanding Product Problems
Companies should have a procedure to make sure they collect all information they can about
product problems when they happen. They must have a policy that employees know about so that
it is employed effectively. When the Firestone tire defects occurred, many of which had been
installed on new Ford Explorers and other light trucks, neither Ford or Firestone had a data
management system to allow them to understand sooner that the problem was persistent, not just
random accidents. Plaintiffs’ lawyers were the ones to uncover the fact of a persistent problem
because the companies had no central data gathering and analysis for such incidents that would
have allowed them to respond sooner.
Strict Liability Based on Implied Warranty. This began by application to food early in the
century. The courts reasoned that sellers of food want us to believe food is fit for consumption,
so it is an implied warranty in contract law. Later applied to other consumer products;
Henningsen (NJ Sup.Ct., 1960) was the most famous case (involving injury due to defective car
brakes).
Note: Implied Warranties under UCC: There is also implied warranty based on UCC § 2-314,
which states that a promise that products are implied to be merchantable—fit for intended
purpose—are a part of the contract. Section 2-315 holds that when a buyer relies on a seller’s
expertise, and the seller knows the buyer relies, there is an implied warranty of fitness for the
particular purpose intended for the product. This is covered in Chapter 11, but may be
appropriate here too.
