The Independent Counsel

Contracts


Design Liability, a Cautionary Tale


BY TOM L. PETERSON

Can a chef be sued if his recipe makes another restaurant's customer sick? In the following case from the files of a Boston law firm, where the "chef" was a local manufacturer, the answer was yes. The following also illustrates how employing in-house counsel effectively might save a company from serious misfortune.

Some years ago, a New England manufacturer was chosen to supply experimental samples of a new product invented by the customer. The sales terms were outlined in a series of letters from the research director of the customer to the marketing director of the manufacturer. To comply with "ISO 9000" certification process by the International Standards Organization, the manufacturer was required to submit with each sample a detailed report of the process followed in its manufacture.

After months of work the vendor produced the samples, which were found to be even better than what the customer expected and the vendor received a purchase order to supply all of the customer's requirements for the new product. Over the next year the vendor met all quality and time schedules and the customer became its largest account.

However, the customer decided at that point that the vendor was charging too much and put the job out to bid, which a foreign competitor won. The bid specifications consisted of the vendor's manufacturing reports, with all identifying marks removed.

Several years later a major product liability claim was filed against the customer. The customer brought its new supplier into the case, which claimed that it had merely followed the specifications like a recipe, so the original vendor was made a defendant. The case was settled for a large sum because of the absence of any warning within the reports that the process should be performed by Ph.D. scientists, which the original vendor assumed, much as a surgical procedure must be performed by a surgeon. The new supplier had used lower cost personnel.

Unfortunately, courts as a matter of public policy have long held architects, industrial engineers and others who design processes liable for foreseeable injury to innocent users, which might be avoided by adequate warnings. This is the doctrine of absolute design liability and has been extended to cover anyone who provides detailed process descriptions for products that could injure consumers, even when the descriptions have been misappropriated, if the jury concludes that such mis-use might have been foreseen.

In discussing the need for a lawyer to participate in the day-to-day activities of a company, at least on a regular part-time basis, the vendor's Boston counsel noted that on one of the first visits by such an "inside" counsel, a routine contracting procedure would have been instituted, something outside counsel are not well equipped to do. Inside counsel could have informed the original vendor of its design liability exposure, and the vendor could have instituted protective measures such as funded indemnity and/or insurance, written confidentiality agreements, and included work product copyright protection within the contract documentation.

Comment: Involve an attorney who knows contract, liability, and intellectual property law closely in your manufacturing company's contracting process.

© ASSOCIATION OF INDEPENDENT GENERAL COUNSEL 1999; (all rights reserved). This article is not intended as legal advice. Consult a qualified attorney for assistance concerning a specific issue or problem.