Class Action Lawsuits – Risks and Mitigation Strategies for Component Manufacturers

Manufacturers of components incorporated into consumer products increasingly find themselves involved in product liability class action lawsuits. Manufacturers can be drawn into these types of lawsuits when their own customer (the end manufacturer of the final product) gets sued and comes knocking on the manufacturer’s door. Manufacturers also may be named as defendants directly by the plaintiffs. Being named in a consumer class action lawsuit sometimes can come as a shock to a manufacturer that has no direct relationship with the end consumers. However, in some jurisdictions, a manufacturer can be held liable in certain circumstances.

Class action lawsuits are a form of lawsuit provided for under the law of most jurisdictions. Class action lawsuits allow a small number of representative plaintiffs to sue on behalf of a much larger class of individuals. Class action lawsuits are particularly notable because, even if the individual claims are relatively small, the aggregate claims often run into the multi-million dollar range, with some of the largest cases even exceeding a billion dollars.

The types of claims that a manufacturer may face in a class action lawsuit are similar to the kinds of claims generally filed against the manufacturer of the end product into which the components are installed. Such claims often include negligence, product liability, fraud, breach of warranty, violation of implied warranty under the Magnuson-Moss Warranty Act, and unjust enrichment claims. Key issues for the manufacturer in these kinds of cases are often: (a) whether the component part was defective; (b) whether the manufacturer breached any warranty to its own customer; (c) whether the end product was defective; (d) whether the manufacturer substantially participated in the design of the end product; and (e) whether privity is required in the jurisdiction. A manufacturer may also face claims for indemnification, contribution, or contract-related claims brought by its own customer.

There are a number of practices that a manufacturer can employ to mitigate the risk posed by consumer lawsuits (class action or otherwise) including:

1. Ensuring that the manufacturer’s contracts with its sub-suppliers (including raw material suppliers) include indemnification obligations that mirror any obligation that the manufacturer has to its customer.
2. Drafting their own warranty provisions in a manner that, to the extent possible, minimizes the manufacturer’s warranty obligations and limits its liability to its customer.
3. In cases where a manufacturer is supplying a product based to a customer’s specifications, documenting that design responsibility lies with the customer. This includes documenting responsibility for any design changes requested by a customer.

As such, manufacturers should take precautionary measures and use best efforts to employ these practices to mitigate the risks of this kind of litigation.