Product liability in the cannabis space is nothing new. Enforcement has been a part of the industry landscape for nearly a decade. Washington saw its first voluntary product recall in February 2016, and by that time, Colorado had experienced 19 recalls in as many weeks.
The cannabis industry is just as susceptible to product liability-related lawsuits as any other consumer packaged good. Manufacturers, brands, and retailers must take essential steps to protect themselves in the event of legal action. Here’s what you need to know.
What is product liability?
Product liability is a theory of liability that seeks to hold manufacturers, distributors, and retailers responsible for injuries caused by defective products. From a legal standpoint, product liability is a tort claim separate from garden-variety negligence. It is often available to plaintiffs due to specific statutes defining a manufacturer, a distributor, and/or a retailer’s duties to consumers of their products.
Types of product liability defects
The types of product liability defects that could cause a manufacturer to be sued vary somewhat from state to state. However, most states allow consumers to sue manufacturers, distributors, and retailers that have a defective design, were incorrectly manufactured, which breach an express warranty, or which failed to adequately warn the consumer of some danger presented by the product.
Who’s responsible for product liability?
No matter which state your business operates, sellers within the supply chain may be financially responsible for losses sustained by product defects, including personal injury, property damage, environmental damage and/or regulatory compliance. Even distributors and retailers who have no means to prevent a product defect can be held liable.
Some states protect “innocent” sellers from strict liability resulting from design defects by shifting such risk to manufacturers as a matter of public policy. But getting embroiled in product liability litigation is inevitably expensive and time-consuming, and can wreak havoc on a company’s reputation.
Indemnification and product liability
Contractual indemnification allows parties to decide at the outset who will bear the risk of loss. It is an obligation of one party (the indemnitor) to pay for the losses incurred by the other party (the indemnitee) or by a third party. This obligation arises when actual loss is ultimately determined, typically by judgment. A comprehensive indemnity provision often includes obligations for the indemnitor to “defend” and “hold harmless” the indemnitee. These obligations require the indemnitor to absorb the cost of defense (even before the claim is adjudicated, if at all) and prevent the indemnitor from making claims against the indemnitee. It is wise to include an attorney’s fees provision, limited to what is “reasonable” — not actual fees incurred.
Tips for retailers negotiating product liability clauses
Broad indemnification and insurance requirements
It is recommended that retailers negotiate for the broadest possible indemnification provision in manufacturing agreements.
Retailers should also insist that manufacturers obtain product liability insurance (where available) and require manufacturers to list retailers as additional insureds. Retailers should demand, prior to finalizing any manufacturing deal, a copy of the manufacturer’s insurance policy, plus applicable endorsements, riders, and exclusions.
Mere insurance certificates do not constitute evidence of insurance and are generally useless if a subsequent dispute arises. While it is a red flag for manufacturers to deny retailers these protections, retailers who want the products anyway due to market forces, like high demand and/or lack of supply, should exploit the economics and attempt to negotiate a lower price to offset the allocation of risk, particularly if insurance is unavailable.
Representations and warranties
However, even the most carefully constructed indemnity may not be effective at shielding the retailer from product liability. Fortunately, retailers may have defenses against claims brought against them, such as: the purchaser modified the product after purchase; the user was not an intended user; an unforeseeable superseding or intervening event was the actual cause of the injury (such as concealment or fraud by the manufacturer); and/or the purchaser failed to follow explicit instructions.
To increase the likelihood that these defenses will be available, retailers should insist upon certain contractual “representations and warranties” from the manufacturer. Stipulations should include all products being packaged and labeled to minimize misuse or modification, and that the manufacturer warrants against known defects.
In some states, manufacturers may be unable to shift the risk of product defects to retailers. Nonetheless, manufacturers may carve out from the scope of a retailer’s indemnity damages sustained by reason of a retailer’s own gross negligence or willful misconduct. Manufacturers may also insist upon an indemnity from some measures that are largely out of the manufacturers’ control after purchase.
Survivability clause
Critical to any indemnification provision is a “survivability” clause, specifying that indemnification obligations survive the duration of the agreement. Some product defects may occur after the agreement expires on its own terms or is otherwise terminated. To avoid open-ended liability, some states give contracting parties wide latitude to shorten the statute of limitations and thus limit the time frame within which they may sue. In this situation, it is wise for both parties to insist upon a cap on the total extent of liability (frequently measured with reference to product sales, a pre-negotiated multiplier and/or previously resolved claims in the industry).
Given the multiple nuances in state law regarding the scope of product liability and defenses (some of which may be more favorable to the retailer or manufacturer), consultation with an attorney is necessary to ensure that you understand the extent of exposure and are comfortable with the allocation of risk.
The best product liability defense is prevention
Ideally, the best defense against product liability is prevention, supported by a comprehensive regulatory framework that standardizes product testing requirements and apportions liability among cannabis sellers within the supply chain. However, in the absence of such regulations, there are preventive measures available to mitigate risk or shift it altogether. This can be accomplished by indemnification and insurance specific to product liability, representations and warranties, and caps on liability and the statute of limitations, among other options.
To explore the best options for your business, reach out to the experienced cannabis attorneys at Rudick Law Group. The right legal representation ensures your company is protected when the unexpected happens. Our business advisory services can also help with prevention, helping your organization shore up standard operating procedures (SOPs) and other protocols that minimize risk. Contact Rudick Law Group for an initial consultation.
A version of this article originally appeared in Marijuana Venture magazine.
.webp)
