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Copyright © 2012 Holland & Knight LLP All Rights Reserved
The Year of the Recall - Who Pays for Fixing Defective Products Under UCC Article 2 on Warranties?
Christopher Carmichael
312-578-6674
Thousands of Recalls Occur Every Year
2014 – the Year of the Recall
• 64,000,000 vehicles recalled in 2014– Greater than 2011, 2012, and 2013 combined
• 803 recall campaigns– 123 involuntary– 680 voluntary
• 253 registered food recalls in 1st & 2nd Q/2014
• Affects manufactures, distributors and retailers– House brand products sold by retailers
• Example - Target’s “up & up” brand
Recall Cycle
Consumer Complaint(s)
Government Investigation
Recall
Issued
Repair, Replace, or
Refund
Pass costs onto
suppliers?
Commercial Aspects of a Recall
• Allocation of the cost of a recall often turns on the terms of a written contract.
• Contracts usually governed by the Uniform Commercial Code.
Article 2 of the Uniform Commercial Code governs the sale of movable goods – from watches to airplanes.
• "Goods" means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (Article 8) and things in action. [§ 2-105]
• All goods sold come with a warranty.
• If goods malfunction, the law of warranty is implicated.
Two Types of Warranties
Express Implied
Express Warranty
• Express warranty [§ 2-313] is:– (1) Any affirmation of fact or promise.– (2) Any description of the goods.– (3) Any sample or model.
• Examples: Written statement or description, designs, specifications, plans, or drawings.
• Do not need to use words such as "warrant" or "guarantee" or even intend to offer a warranty, in order to create a warranty.
Implied Warranties
Merchantability [§ 2-314]
• Means that:– 1. Goods can pass without objection in the trade– 2. Fungible goods are of fair/average quality– 3. Fit for the ordinary purposes for which such goods are used
• Products in lots can have variations and still be merchantable
Fitness for a Particular Purpose [§ 2-315]
• Arises when: – the seller “at the time of contracting” has reason to know any particular
purpose intended for the goods and the buyer relies on seller's skill or judgment to select or furnish suitable goods
• Implied warranties arise automatically, unless properly disclaimed.
Conflicts between Warranties
• Multiple representations about the attributes of the goods are construed as consistent with each other and cumulative [§ 2-317].
– For example, a statement in the contract about the product being free from manufacturing defects and the design schematics are both part of the warranty.
• If there is a conflict:– (a) Exact or technical specifications displace an inconsistent
sample or model or general language of description.– (b) A sample from an existing bulk displaces inconsistent general
language of description.– (c) Express warranties displace inconsistent implied warranties
other than an implied warranty of fitness for a particular purpose.
Breach of Warranty - Liability
Three Categories of Damages • Difference in value [§ 2-714]:
– The difference at the time and place of acceptance between the value of the goods accepted and the value they would have had if they had been as warranted.
• Incidental expenses [§ 2-715]:– Expenses reasonably incurred in inspection, receipt, transportation, and care or
custody of rejected goods.– Commercially reasonable charges, expenses, or commissions in connection with
replacement goods.
• Consequential damages [§ 2-715]:– Any loss resulting from general or particular requirements and needs of which the
seller had reason to know of at the time of contracting; and– Any injury to person or property proximately resulting from any breach of warranty.
Who is potentially liable?
Supplied
Parts
• Component supplier or• Vendor
Made it
• Manufacturer/Designer• or US Distributor of foreign product
Sold it
• Retailer or• Seller
Who pays for the cost of the recall?
• Depends on who is at fault.– Product design problem.– Component defect problem.– Or Both.
• Example - defective thermostat on water cooler• Off the shelf product/No specifications.• Dispute about who selected, and whether manufacturer used
expertise to select thermostat. • Wrong application for that type of thermostat/Should have
used waterproof version (cost more $$$).• Thermostat installed in poor location.
– Could have used same thermostat if installed in different location.
Who pays for the cost of the recall? (cont.)
• Example – design defect in outdoor light fixtures caused short and possible fire.
– Company imported high-end/designer light fixtures from Europe. – Contracted with manufacturer to modify fixtures to comply with US regulations and
listings. – Warranted that fixtures would meet US Codes (i.e., UL listing) for outdoor (“wet”)
locations.
• Manufacturer denied problem/Refused to participate in recall.• Distributor recalled and either replaced or repaired fixtures.• Manufacturer found liable after arbitration based on the failure to meet
written specifications.– Evidence from Underwriters’ Laboratories of non-compliance was key.– Witness explanation of defect on demonstrative fixture very persuasive.
Example of Recall - Recalled Heated Jackets
Issue • Heating components could create an electrical short, hot spot, and
melt the fabric in the jacket.
Cost to Recall• Hard costs - $9,400,000
– 6,300 jackets - $1,500 per jacket– 7x the original product cost
• Additional cost:– Personnel/time, reputation, etc.– Recalled jackets occupied storage space
Sought Recovery from Component Supplier• Columbia sued component supplier for breach of implied warranty –
heating components not fit for ordinary purposes.– Heating components cost a total of $950,000
What we can provide:
• Advise on terms of warranties and limitations of liability.
• Advise on contract and warranty terms from suppliers.
• Assist in determining failure causation and locating possible avenues of cost recovery.
• Determine ability to recover against others.
• Pursue recovery.
• Advise on terms of warranties and limitations of liability.
• Respond to claims of defect and failure causation.
• Determine scope of warranty provided and possible exposure for breach of warranty.
• Determine possible defenses.• Defend against claims.
Manufactures/Designer Suppliers/Vendors
Christopher
Carmichael
Partner
Chicago
Presenter/Resource
• Represented Manufacturers and Distributors against warranty claims for the costs of recall and retrofits.
• Example representations:– Defended supplier of component for heavy duty commercial
trucks against end manufacturer’s/seller’s claims for cause of failure and retrofit.
– Recovered costs of recall and replacement for distributor of high-end light fixtures from contract manufacturer of product based on a failure to meet specifications.
– Defended supplier of component thermostat for water dispensing system against end manufacturer’s/seller’s claims for cost of nationwide recall.
• Represented Manufacturers, Distributors, and Retailers against breach of warranty claims.
Questions
