Evaluation of product liability and risk for a product manufactured outside the United States is complex and nuanced. A necessary threshold consideration is the relationship between the non-U.S. manufacturer and its U.S. distributor. That relationship will impact numerous litigation-related issues for both parties, including jurisdiction, scope of defense and indemnification obligations, discovery, and collection of judgments.
Imagine a scenario where a product manufactured outside of the United States allegedly injures someone in the United States and that person files a lawsuit. However, before the product reached the United States, the foreign manufacturer agreed to sell the product to another non-U.S. company. That second non-U.S. company then reached an agreement with another U.S. company to sell the product in the United States. The terms of those agreements will dictate the future of the litigation, including which court has jurisdiction, who has to defend the suit, what insurance may apply, whether relevant evidence can be obtained from each company, and who ultimately pays a settlement or judgment, if any. The terms of the companies' agreements dictate each company's position in the distribution chain, from the foreign manufacturer to the U.S. distributor's litigation risk.
Organizations need a clear understanding of the roles and relationships between a foreign manufacturer and a U.S. distributor, their potential impact on U.S. product liability litigation and how the relationship between the two entities impacts discovery— the most time-consuming and costly element of U.S. litigation.
The Scope of the Relationship
The most significant liability factor for the distributor and the foreign manufacturer is likely their legal relationship, which will vary greatly and often depends on whether the manufacturer and the distributor are part of the same corporate family. If that is the case, their contractual relationship may be less structured, adding to their risk in U.S. litigation.
For example, a plaintiff seeking to hold a foreign manufacturer liable in the United States often faces steep jurisdictional challenges by the foreign manufacturer based on the defense of personal jurisdiction. Generally, the rules around personal jurisdiction require that a defendant has done something in the jurisdiction that causes that defendant to be "haled into court" there. If a foreign manufacturer's only connection to the United States is sending a product to a port of entry, that port of entry might be the only place where the foreign manufacturer can be sued.
Meanwhile, the distributor of that foreign manufactured product is generally subject to the jurisdiction of courts in any venue where they distribute the product, likely including the jurisdiction where the plaintiff has filed suit. Critically, sometimes the corporate distinctions between the U.S. distributor and the foreign manufacturer are not well defined. In that case, some courts have found that the distributor is effectively the agent for the foreign manufacturer, allowing the court to take jurisdiction over the foreign manufacturer based on that agency's determination when the court would not otherwise be able to do so.
In classic product liability situations where liability arises from a defect in the product's design, manufacture or warnings, the manufacturer is typically the target defendant. Distributors in that situation will usually tender their defense and indemnity back to the manufacturer based on indemnity and "hold harmless" language in the distribution agreements. This strategy makes sense because a product's design, manufacture and labeling are typically the manufacturer's responsibility.
Agreements between foreign manufacturers and U.S. distributors are distinctive. Foreign manufacturers often want to avoid dealing with U.S. litigation, meaning that the agreements require the U.S. distributor to indemnify and hold harmless the foreign manufacturer from U.S. litigation. However, when it comes time to defend that litigation, the U.S. distributor is typically at a severe disadvantage because it lacks design records, manufacturing records, product testing information and other documentation that is usually essential in defending the product.
In addition, when personnel at the U.S. distributor are deposed about the product, they often lack important technical knowledge, which also puts the distributor at a disadvantage. Foreign rules about the release of information out of the country may impair the foreign manufacturer's ability to share that information with the U.S. distributor, and it may decline to do so even without foreign legal constraints.
The U.S. distributor will typically also have a significant role in obtaining U.S. regulatory approvals for products sold in the United States. Therefore, the distributor may be responsible for labeling, including providing warnings to customers about the product. This means that the foreign manufacturer and the U.S. distributor share risk regarding product liability claims that focus on insufficient warnings—a growing segment of such claims. A clear definition of regulatory approval roles in the distribution agreement can help the defense focus the case on the responsible party.
Impact of the Relationship on the Scope of Discovery
Discovery presents additional complications based on the venue's laws and the laws of the foreign entity's location. Evaluation of those issues includes analysis of the venue's laws and the laws of the foreign entity's location determines the entity's responsibilities for obtaining and responding to discovery. If the foreign manufacturer is not a party to the lawsuit, obtaining evidence directly from that entity will require a detailed analysis of personal jurisdiction, consideration of international treaties on service and consideration of international comity via the Hague Convention or applicable rules of civil procedure. Such analysis will also consider conflicts between U.S. and foreign law, such as data privacy and data transfer regulations, preservation of evidence requirements, and regulatory compliance in the company's home country. However, litigants often attempt to simplify the discovery of evidence maintained outside the United States by seeking it directly from the U.S. distributor using typical discovery methods.
Clearly defining the relationship between the entities takes on practical importance regarding the potential scope of discovery in U.S. litigation. Under the Federal Rules of Civil Procedure, and commonly included in state rules of civil procedure, a party must produce documents within "its possession, custody or control." Courts have embraced a fact-specific inquiry into the meaning of "control" in this context, including analysis of evidentiary guideposts to determine whether the party has the legal right or practical ability to obtain the documents on demand.
Consider a situation where a foreign parent company manufactures a medical device sold by its U.S. distributor in the United States. A mass tort commences with many cases filed claiming that the device causing injuries is defectively designed and labeled. Only the U.S. distributor is sued, but information and documentation maintained by the parent company are demanded in discovery. Rather than going through the Hague Evidence Convention to seek documents directly from the parent, plaintiffs' counsel seeks the documents from the U.S. subsidiary distributor. The distributor denies "control" over these materials, but the plaintiff moves to compel production from the distributor, claiming that even if the documents are not in the distributor's possession, it has access to them in the normal course of its business with the foreign manufacturer. An unfriendly court may order production from the distributor, in which case the distributor can stand on its position that it lacks control. Now, the distributor faces potential sanctions from the court, including a possible default judgment, if it does not retrieve the documents from the parent. This situation is common, and it tests the resolve of the U.S. distributor and foreign parent as to what they should do next: stand on principle and risk court punishment or give in and choose a better battle.
Most courts will consider other factors to determine whether the U.S. subsidiary should be ordered to produce documents that it theoretically can obtain from the foreign parent manufacturer. Other factors may include: commonality of ownership; overlap of directors or officers; exchange of documents in the ordinary course of business; and the role of the companies in each other's marketing, servicing and financial relationship. Courts will also consider data-sharing between the entities and access to data through computer networks, including access to relevant aspects of the business, such as manufacturing, marketing, regulatory compliance, and research and development. In addition, courts will closely examine the non-party's connection to the litigation in determining the relationship between the entities to decide whether it can order the production of documents or other materials from the distributor that the foreign parent company holds.
In this way, courts may find that foreign companies that manufacture products for sale in the United States have obligations regarding potential evidence if their products are subject to U.S. product liability litigation. However, those obligations may be curtailed by clear contractual language between the foreign manufacturer and its U.S. distributors. Agreements providing that information may be shared only upon request and with the agreement of the foreign entity could result in the U.S. distributor being forced to produce such information, with no guarantee that it will help the distributor's defenses.
If there is no obligation to share information or documents, a U.S. distributor fighting to avoid production of material during litigation may be able to rely on the agreement's terms and instead force plaintiffs to try to secure the documents directly from the foreign manufacturer. This significantly increases the burden on plaintiffs and their counsel when it includes the high hurdle of securing information through U.S. treaties, which may require compliance with foreign court discovery rules.
Practical Considerations
Because of the difficulty of securing jurisdiction over and discovery from foreign manufacturers, U.S. plaintiffs tend to begin and end their litigation by pursuing the U.S. distributor. The U.S. distributor and the foreign manufacturer should consider that dynamic when structuring their relationship. Regardless of whether the distributor and manufacturer are affiliates within the same corporate family, the relationship should be well-defined and address the following issues:
- A discussion about agency (or lack thereof)
- Clearly defined roles around design, manufacture, regulatory, compliance and labeling responsibilities for the product
- Clear boundaries around the sharing of information, employees, directors and officers
- Risk transfer considerations such as limitations of liability, defense and indemnification, including insurance coverage
In addition, and especially for companies that are affiliates in the same corporate family, a clear corporate distinction is critical to prevent the foreign manufacturer from being brought into court based on the court's jurisdiction over the affiliated U.S. distributor.
Originally published by The Risk Management Society (RIMS) Risk Management Magazine on July 30, 2024
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.