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Product liability: retention and risk management solutions: records managers should take the lead in developing a cross-functional team to prepare for possible product liability litigation issues.

by Haider, Mary W.

Information Management Journal • Jan-Feb, 2006 • Management Wise

A 15-year-old boy disassembles his new paintball- gun after using it. His friends hear a hissing sound and then a "pop." The carbon dioxide container that powered the paintball gun detached and struck the teenager above his eye, causing a frontal head injury.

Who is responsible?

* The boy for not following safety procedures when disassembling the gun

* The parents for not properly supervising the gun use

Who can be sued?

* The manufacturer for defective assembly of the product

* The component manufacturer for producing a defective product

* The retailer for selling a dangerous product

When can a lawsuit be initiated?

* Within one year of the incident

* Within one year of the sales transaction

* Within 15 years of the sales transaction

* Whenever injury occurs

Where can a lawsuit be initiated?

* Only in the state/country where the sales transaction occurred

* Only in the state/country where the incident occurred

* In any state/country where the product is/was sold

* In any state or country

Does it matter if the paintball gun is one year old or 10 years old? What if the boy is 12, 21, or 45 years old? Does the answer change if the incident occurred last year or 20 years ago? The answers lie in product liability law--an area with implications for records management programs.

Product Liability Defined

An overview of this topic from Wex, a collaborative online legal dictionary/ encyclopedia hosted by the Legal Information Institute at Cornell Law School, states that "Products liability refers to the liability of any or all parties along the chain of manufacturing of any product for damage caused by that product. This includes the manufacturer of component parts (at the top of the chain), an assembling manufacturer, the wholesaler, and the retail store owner (at the bottom of the chain). While products are generally thought of as tangible personal property, products liability has stretched that definition to include intangibles (gas), naturals (pets), real estate (houses), and writings (navigational charts)."

The Wex overview states that defects in design, manufacturing, and marketing are the three types of product defects for which manufacturers and suppliers incur liability. "Strict liability wrongs do not depend on the degree of carefulness by the defendant," according to Wex. "It is irrelevant whether the manufacturer or supplier exercised great care; if there is a defect in the product that causes harm, he or she will be liable for it."

The authors of a 2004 article in Insurance Journal concurred, "... products liability is generally considered a 'strict liability' tort, i.e., liability doesn't depend on showing negligence; simply showing a defective product, or a failure to give adequate warnings, and a resultant injury is enough to establish a prima facie case of liability. It's irrelevant that the defendant used great care, etc."

Product Liability Legal Remedies and Their Effects

Litigation in the United States is most notable for its spiraling costs and insurance rates. But, according to the law firm of Monheit, Silverman, and Fodera, "A products liability lawsuit is the best, if not the only, remedy for consumers injured by unreasonably dangerous products ... The products liability lawsuit is the consumer's most effective weapon against unreasonably dangerous products. Regulations often lack teeth and offer little more than a wrist slapping to the manufacturer ... Because of the consumer's right to personally enforce the law through his or her decision to bring a products liability lawsuit, manufacturers know that if they create a product that is unreasonably dangerous, they subject themselves to serious liability."

Randall Goodden, a product liability prevention specialist says, "The epidemic of product liability lawsuits in the United States results in many corporations now being required to pay substantial risk insurance premiums or defense costs, forcing what might have been healthy organizations into major deficits, if not bankruptcy. Insurance premiums for U.S. companies are twenty times greater than that of companies overseas."

Who Is at Risk

Product liability laws can be applied to any organization that operates within the supply chain. This includes:

* Component manufacturers

* Finished goods manufacturers

* Distributors

* Retailers/Wholesalers

* Repairers

* Assemblers

* Testing Laboratories

* Designer/Engineering Firms

An organization that can be classified in one or more of these categories maybe a target for product liability litigation. Organizations that include research and/or manufacturing of consumer products--and especially those in highly regulated industries--may respond to product liability litigation on a frequent basis. Other organizations may respond to relatively few cases.

Sources of information needed in product liability cases may reside in unlikely places. Accounting records, for example, may contain the information needed to prove or disprove that a company has sold a specific product on a specific date to a particular customer--the very information that a risk management group may need. Therefore, it may not be possible to destroy such records on schedule, even though they have met all applicable regulations and the required legal, tax, and accounting managers have signed off. The issue becomes one of developing an effective records retention requirement without resorting to assigning permanent retention to all records series. Under the circumstances, then, it is beneficial to be proactive and establish a program for identifying and managing the affected records series. This can be done by:

1. Identifying applicable statutes of limitations and statutes of repose

2. Identifying target records series

3. Identifying risk levels for the organization and records series

4. Collaborating with key business units

[ILLUSTRATION OMITTED]

Statutes of Limitation and Statutes of Repose

U.S. statutes of limitation and statutes of repose determine the time limits for initiating litigation. The statute of limitations measures the time limit from when the injury occurred. The statute of repose measures the time from when the product was sold.

These statutes vary greatly. For example, in Illinois, the statute of repose on products liability action is 10 years. An example provided by attorney John Lucas is of a person who is injured by a defective saw purchased 11 years earlier being unable to bring action against the manufacturer--even if it was the first time the saw was used. "Such limitation periods serve an important function by bringing litigants into their attorneys' offices and into court at the earliest possible time to insure that evidence is preserved, that witnesses' recollections are fresh, and that neither party is prejudiced by undue delay," Lucas said.

Based on the statutes of repose, it appears that a 10-year retention requirement is adequate. However, the statute of limitations is not as precise. The time limit for this law is based on "when an injury occurs or when the injured party discovers that he or she has been injured." If the statute of limitation applies to the injury, the lawsuit can be initiated as long as the product is in use.

Lawsuits are filed in the state where the incident occurred, so it is necessary to consider the laws of all states where the product might be used. In addition, each state may have either or both laws and may specify the industries or product categories included. Global organizations must also factor in the international laws that apply.

These limitations provide a type of boundary for litigation. But if an organization is involved in more than one type of product or services--and, if that same organization operates in more than one state (or country)--the records retention decisions become much more complex. [See Sidebar: Consumer Protection Laws, page 57.]

There are several resources that summarize these statutes of limitations and statutes of repose for each state. [See Sidebar: Resources, page 57.] Records managers need to be familiar with these, but more importantly, records managers need to discuss these statutes with their legal organization before deciding which laws to apply to the retention analysis.

Identifying Target Records Series

To identify the necessary or potential target records requires answering this question, "What documentation or information will prove or disprove a potential allegation?" This requires serious discussion with litigation attorneys and/or the risk management team.

Product liability prevention programs prescribe a methodology of identifying, organizing, and retaining documentation from a variety of business functions. This may he a response to a lack of records management at the creation level. Many organizations have not deliberately designed the creation of their business records based on business needs such as operational, legal, fiscal, or historical. As a result, they are not sure they have adequate documentation, and they may not be able to locate or access the documentation when it is needed. A proactive records management program can solve this problem.

Goodden, in his article "Understanding the Focus of Product Liability Prevention" in The CEO Refresher, says a product liability prevention program identifies documents and records series from various business functions such as

* Customer contracts/agreements

* Product design

* Marketing/advertising

* Reliability testing

* Document control

* Warranties

* Labeling

* Records retention

* Supplier selection

* Recall process

* Accident reporting

* Accident investigation

* Litigation management

These functions typically create and/or maintain information that is often requested through product liability litigation. The most obvious records and information may include

* Product information

* Safety information

* Production/distribution information

* Complaint files

* Product recall files

* Product recall communication

But equally useful and important are

* Accounting records

* Contractor/sub-contractor files

* Merger/acquisitions

Records Retention Analysis and Risk Analysis

The records management team is responsible for researching all the relevant laws and information. Typical legal research for records retention identifies the laws that relate to specific business functions and workflows. For example, the legal research for records created and used by the accounting function will generate a list of laws relating to fiscal issues and may include limitations of actions such as:

* Filing claims for refunds

* Violations on tax issues

* Actions to collect taxes

* Actions for relief on the ground of fraud or mistake

* Limitations for allowing tax refunds or credit

However the statutes of limitations and statutes of repose are not directed to specific business functions. Instead, it is necessary to identify the statutes that apply to the organization based on location and product line, determine how long the organization can be held liable, and then apply retention to the records series that are relevant to potential product liability litigation.

If the records retention value based on the statutes of limitation and statutes of repose exceeds the values already identified for operational, fiscal, and historical values, the final decision will be based on a risk management analysis that considers possible solutions.

* Will this retention requirement be applied to all records series identified as relevant to product liability cases?

* Will the retention requirement only be applied to those records series that are evaluated as a high risk for the organization?

* Will those records series identified as low or medium risk require a retention set somewhere between the two values?

Manufacturing and research organizations may automatically include the statutes of limitation and statutes of repose in their legal research for those records series that relate directly to the research and manufacturing processes. Other organizations in the supply chain may not have recognized their potential liability. And some records series that provide the best evidence and defense are not always recognized as target records.

A national organization with a broad product line may find it difficult to identify specific retention requirements because the applicable laws may overlap, and some may have vague limitations (e.g., "when an injury occurs or when the injured party discovers that he or she has been injured"). The difficulty in applying a precise time frame tends to encourage a "permanent" retention decision. However, this decision should be viewed as a risk management decision and should balance the long (or permanent) retention requirement against the risk level of the various records series that may be requested through discovery. These decisions will vary by organization and industry.

The records management team in collaboration with the expertise of the key partners--legal, risk management and quality--can then complete the records analysis for the target documentation. The RIM business goal is to protect and defend the organization and to minimize the records retention requirements.

The Importance of Collaboration

Cross-functional business teams and enterprise electronic systems are influencing the way business is conducted today. Decisions and actions in any one functional group will affect other functional groups up or down the workflow process. But as companies move toward more effective and efficient operations, it is necessary to eliminate those bottlenecks that often occur as a result of independent actions and decisions.

Managing business records to minimize adverse litigation discovery requires collaboration among records management, legal, risk management, and quality as well as the business functions and workflows that create the documentation. If a working relationship with these key partners has not been established, now is the time to do so. Explain the role of records management, but spend a substantial amount of time learning about the other functions by asking questions and listening to their interests and concerns. Most of these functional areas understand that records need to be managed, but they simply do not have the time to work through these issues.

Once the working relationship is established, meet with each key partner to discuss the issues of product liability. These meetings should include a review of the records series and information that has been identified for product liability cases and a risk analysis of each category. The risk analysis is based on historical evidence of the records most likely to be requested and an understanding of the evolving e-discovery rules.

The accompanying records retention analysis worksheet on page 58 is a tool to collect and present the analysis process for the target records series. It includes documents and records series most likely to be required for product liability litigation. Compare this list to a current records inventory, identify the current retention analysis for those records series, and add the current retention requirement to the chart. At each meeting, review the list of records series and information. Identify those records that are recognized as relevant and add any records series that are not included. Then, ask the partners to evaluate the level of risk for each records series as high, medium, or low. This evaluation should reflect the relative impact on the organization if the records are not available for future litigation.

Additional discussion questions will develop a better understanding of how each function uses the various business documents and why it is important for them. [See "Sample Discussion Questions for Key Partners" on page 60.] Meet with each partner individually so to focus on that specific function. At a later time, it will be useful to meet as a cross-functional group and revise the records series lists for a consolidated risk analysis.

In summary, product liability considerations require that classic records management methodology be extended to include risk assessment issues found in the statutes of limitations and the statutes of repose. When the records retention and risk management evaluations are completed, the records management team will have created a valuable tool for the business units that respond to product liability litigation. But more importantly, the records management team will have integrated the records management process with key business partners by delivering a product based on cross-functional processes.

At the Core This article

* Defines product liability and its legal remedies

* Explains the process of identifying records series that may be affected by litigation

* Explores the role of the records manager in creating and educating cross-functional teams

Consumer Protection Laws

In the United States, there are several legislative acts designed to protect consumers from product defects including the Consumer Protection Act, Occupational Safety and Health Act, and the Environmental Protection Act. Each of these acts establishes an organization or agency whose mission is to represent the interests of consumers. For example, the Consumer Protection Act of 1997 states, "It is the purpose of this Act to protect and promote the interest of the people of the United States as consumers of goods and services which are made available to them through commerce or which affect commerce, by so establishing an independent Agency for Consumer Advocacy." Congress also articulated that it "finds that the interest of consumers are inadequately represented and protected within the federal government and that vigorous representation and protection of the interest of consumers are essential to the fair and efficient functioning of a free market economy."

Each of these organizations develops and enforces regulations within the scope of its mission. The Occupational Safety and Health Administration (OSHA) regulations are published in the Code of Federal Regulations (CFR) Title 29.The Environmental Protection Agency (EPA) is "responsible for researching and setting national standards for a variety of environmental programs. "EPA regulations are published under Title 40. The Bureau of Consumer Protection (under the Federal Trade Commission) follows a mandate to "protect consumers against unfair, deceptive, or fraudulent practices."

Product liability is not unique to the United States. A quick Internet survey identifies a variety of laws and regulations around the globe. The European Union (EU) has issued directives for consumer protections, but each EU member establishes its own laws based on those directives. In Latin America, me traditional approaches are being modified toward various trends such as treating product liability as autonomous, unification of contractual and extra-contractual liability, eliminating the need to prove negligence, and expanded liability. The Australian Competition and Consumer Commission implements the Trade Practices Act that applies to goods supplied after July 9,1992. In 1993, China's Product Quality Control Law became effective. The purpose of any of these laws is to protect consumers by making companies responsible for useful as well as safe products.

The global business community struggles with the variations found among consumer protection laws. For example, Dow Chemical Corporation estimates that it spends 100 times more on litigation costs in the United States than it does in Europe. As more Asian manufacturers begin marketing their products overseas, they are likely to find themselves exposed to more lawsuits in the United States.

Resources

* Australian Competition and Consumer Commission

Product Liability

www.accc.gov.au/content/index.phtml/itemId/268708

(accessed 28 November 2005)

* Bowman and Brooke LLP

International Product Liability Laws

FindLaw for Legal Professionals

library.findlaw.com/ 999/Aug/1/129312.html

(accessed 28 November 2005)

* Federal Trade Commission

The Bureau of Consumer Protection

www.ftc.gov/ftc/consumer/home.html

(accessed 28 November 2005)

* Perkins Cole Attorneys at Law

Product Liability Resource Center

www.perkinscoie.com/page.cfm?id=181

(accessed 28 November 2005)

* Presser, Stephen B.

How Should the Law of Products Liability Be Harmonized? What Americans Can Learn from Europeans in 2 Global Liability

Issues

February 2002

Manhattan Institute Center for Legal Policy

* The Center for Study of Responsive Law

Consumer Protection Act

www.csrl.org/modellaws/protection.html

(accessed 28 November 2005)

* U.S. Environmental Protection Agency

About EPA

www.epa.gov/epahome/aboutepa.htm

(accessed 28 November 2005)