DTCI: Are sellers safe from strict liability under the IPLA?

By Jordan Slusher

Slusher

The majority of states have statutes that specifically address when and to what extent an injured person can maintain an action against a retailer or distributor of a product for injuries arising from the use of that product. These statutes, commonly referred to as “innocent seller” or “innocent distributor” statutes, are usually found within the body of each such state’s product liability statute and allow a truly innocent seller or distributor to obtain dismissal of some or all of a plaintiff’s product liability claims against it. Like most states, Indiana’s Product Liability Act, Indiana Code § 34-20-2-1 et seq. (IPLA) contains an innocent seller statute. Found in section 34-20-2-3 of the IPLA, the innocent seller statute bars actions based on “strict liability in tort” against sellers unless the seller is a manufacturer of the product or of the part of the product alleged to be defective. Ind. Code § 34-20-2-3. The IPLA further permits strict liability actions against sellers where jurisdiction cannot be obtained over the manufacturer and the seller is a principal distributor or seller of that manufacturer’s product. Ind. Code § 34-20-2-4.

Practitioners who regularly represent sellers in product liability cases should become thoroughly familiar with these statutes and the case law surrounding them. Counsel should not assume that simply because their client is a seller, their client is protected from strict liability. As addressed in this article, there are certain circumstances under which a seller can be held strictly liable and unable to avail itself of the protection of the innocent seller statute.

Product seller liability generally

The IPLA governs all claims brought under Indiana law by a user or consumer against a manufacturer or seller for physical harm caused by a product, regardless of the substantive legal theory upon which the claim is brought. Ford Motor Co. v. Rushford, 868 N.E.2d 806, 809 (Ind. 2007) (observing the IPLA governs all product liability claims whether based on negligence, strict liability, or other tort theory). In general, the IPLA imposes liability upon persons and entities who sell, lease, or otherwise put into the stream of commerce any product in a defective condition unreasonably dangerous to any user or consumer when that product causes physical harm to the user or consumer or the user or consumer’s property. Ind. Code § 34-20-2-1. Product liability cases can be brought based upon an alleged manufacturing defect, design defect, or an alleged failure to provide adequate warnings or instructions regarding the use of the product. By the express language of the IPLA, strict liability applies to manufacturing defect claims while design and warning defect claims are controlled by a negligence standard. See Ind. Code § 34-20-2-2. The distinction between the two standards is important to understand as a practitioner who regularly handles product liability cases.

Where a claim is based upon a manufacturing defect, and a strict liability standard applies, the manufacturer or seller faces liability even where it exercised all reasonable care in the manufacture and preparation of the product. Id. In contrast, where a claim is based upon a design defect or inadequate warning, and a negligence standard applies, the plaintiff must establish that the manufacturer or seller failed to exercise reasonable care under the circumstances in designing the product or providing the warnings. Id. After reading section 34-20-2-2, one may think that it unequivocally subjects sellers to both negligence and strict liability under the IPLA. However, the story does not end there.

Practitioners representing sellers should direct their attention to section 34-20-2-3, which exempts sellers from actions based on strict liability in tort. Section 34-20-2-3 provides:

“A product liability action based on the doctrine of strict liability in tort may not be commenced or maintained against a seller of a product that is alleged to contain or possess a defective condition unreasonably dangerous to the user or consumer unless the seller is a manufacturer of the product or of the part of the product alleged to be defective.” Id.

Added to the IPLA in 1995, the purpose of section 34-20-2-3 is to protect truly innocent sellers from strict liability where the seller played no role in the manufacture of the product. Strict liability is preserved for the manufacturer because manufacturers are usually in a better position to recognize and remedy product defects.

By the plain language of section 34-20-2-3, when the theory of liability is based on strict liability in tort, an entity that is merely a seller cannot be held liable. The IPLA defines seller as any person or entity “engaged in the business of selling or leasing a product for resale, use, or consumption.” Ind. Code § 34-6-2-136. In evaluating whether a seller may avail itself of the protection contained in section 34-20-2-3, two questions must be analyzed by counsel for the seller.

Is the seller a “manufacturer” of the product or of the part of the product alleged to be defective?

Notwithstanding the exemptive language in section 34-20-2-3, a seller can be held liable under a strict liability theory if the seller is “a manufacturer of the product or of the part of the product alleged to be defective.” Ind. Code § 34-20-2-3. Therefore, counsel must evaluate whether the seller could fall within the definition of manufacturer under the IPLA.

The IPLA defines manufacturer as “a person or an entity who designs, assembles, fabricates, produces, constructs, or otherwise prepares a product or a component part of a product before the sale of the product to a user or consumer.” Ind. Code § 34-6-2-77(a). Manufacturer also expressly includes a seller who (1) has actual knowledge of a defect in a product; (2) creates and furnishes a manufacturer with specifications relevant to the alleged defect for producing the product or who otherwise exercises some significant control over all or a portion of the manufacturing process; (3) alters or modifies the product in any significant manner after the product comes into the seller’s possession and before it is sold to the ultimate user or consumer; (4) is owned in whole or significant part by the manufacturer; or (5) owns in whole or significant part the manufacturer. Id.

Counsel must carefully examine the seller’s conduct and involvement in relation to the product in conjunction with section 34-6-2-77(a) and determine whether the seller could be deemed a manufacturer. In doing so, counsel should review the caselaw interpreting and applying section 34-6-2-77(a) to determine under which facts or circumstances sellers have been deemed manufacturers. For instance, a seller can sometimes be deemed a manufacturer where the seller puts its name on the product and passes it off as its own without identifying or disclosing the actual manufacturer. See, e.g., Lucas v. Dorsey Corp., 609 N.E.2d 1191, 1201 (Ind. Ct. App. l993); See also Ind. Code § 34-6-2-77(b). If the seller’s conduct falls within any part of the definition of manufacturer, the seller will be unable to avail itself of the innocent seller statute.

Is the seller a principal distributor or seller?

A seller can also be held liable to the same extent as a manufacturer — and thus subject to strict liability — where the seller is treated as a manufacturer under section 34-20-2-4. Section 34-20-2-4 provides that a seller may be deemed a “manufacturer of the product” if the court is “unable to hold jurisdiction over the manufacturer” and the seller is “that manufacturer’s principal distributor or seller” over whom the court can exercise jurisdiction. Ind. Code § 34-20-2-4. Section 34-20-2-4 effectively ensures injured consumers are not deprived of a remedy in strict liability tort where the court is unable to obtain jurisdiction over the manufacturer.

Counsel representing a seller should analyze whether (1) the court can hold jurisdiction over the manufacturer and, if not, (2) whether the seller could be considered a principal distributor or a seller. The IPLA defines seller but does not define the terms principal or distributor. The Indiana Supreme Court recognized this ambiguity in Kennedy v. Guess, Inc., 806 N.E.2d 776, 782 (Ind. 2004). There, the Court resorted to the Black’s Law Dictionary to define principal or distributor. Id. The Court noted the Black’s Law Dictionary defined principal as “chief; leading; most important or considerable; primary; original,” and defined distributor as “any individual, partnership, corporation, association, or other legal relationship which stands between the manufacturer and the retail seller in purchases, consignments, or contracts for sale of consumer goods; a wholesaler.” Id.

A court may be unable to obtain jurisdiction over the manufacturer for any number of reasons. The manufacturer may be bankrupt or defunct. The manufacturer may be located in a foreign jurisdiction and not otherwise subject to Indiana’s jurisdiction. In Kennedy v. Guess, Inc., 806 N.E.2d 776 (Ind. 2004), the plaintiffs brought negligence and strict liability claims against a distributor and manufacturer of an umbrella after the umbrella broke into pieces and struck one of the plaintiffs in the face, causing injury. The Indiana Supreme Court addressed the application of section 34-20-2-4 for the first time and ultimately allowed the strict liability claims to proceed against the distributor. The Court found that jurisdiction could not be obtained over the manufacturer because the plaintiffs were unable to serve process on the manufacturer, which was located in Hong Kong and had no contacts with the state. Id. at 781. The Court also relied on the manufacturer’s having filed bankruptcy and having gone out of business. Id. The Court further found the distributor could be considered a principal distributor because the distributor’s stores were the primary means of distribution for the product during the year the injury occurred and did a large volume of sales for the manufacturer, although the Court noted it was a question of fact for the jury. Id.

Counsel for a seller should promptly identify the manufacturer, determine where it is principally located, and evaluate its contacts with the state. Sellers generally have such information readily available to them, but counsel should always supplement the seller’s information with his or her own research on the manufacturer. Counsel will also want to consult the law pertaining to personal jurisdiction. If the facts and law raise even a doubt about the court’s ability to hold jurisdiction over the manufacturer, then counsel should evaluate whether the seller may be deemed a principal distributor or seller of that manufacturer’s product. Counsel should consult the seller and inquire about how much business the seller does with the manufacturer and, specifically, the volume of sales the seller does for the manufacturer’s product. If the seller is the exclusive or primary distributor for the manufacturer or does a large volume of sales for the manufacturer, the seller could be deemed a principal distributor or seller under section 34-20-2-4.

Sellers exempted from strict liability, but not negligence.

If counsel determines their client is merely a seller and subject to the protection against strict liability under section 34-20-2-3, then the seller can seek dismissal of the strict liability claim against it. Recognize, however, that in cases where a plaintiff has asserted both a strict liability claim and negligence claim, a seller can still be subjected to liability for negligence. In Heritage Operating, L.P. v. Mauck, 37 N.E.3d 514 (Ind. Ct. App. 2015), the plaintiff asserted claims under the theories of negligence, strict liability, and breach of express and/or implied warranties. The defendant seller moved for summary judgment, asserting the innocent seller protection under section 34-20-2-3. The court granted summary judgment in favor of the retailer as to the strict liability claim but denied summary judgment as to the negligence and breach of warranty claims. In doing so, the court recognized that section 34-20-2-3 applies only to “the doctrine of strict liability” and not to actions grounded in negligence.

The final takeaway

Here are the important takeaways. Whether you are in-house counsel or outside counsel for a distributor or seller of goods, you should be familiar with how the innocent seller statute operates under Indiana Code section 34-20-2-3 and how it may apply to your client to exempt it from strict liability claims under the IPLA. This requires that you first evaluate whether your client would be considered a seller or a manufacturer under the IPLA. In doing so, you will need to familiarize yourself with your client’s role in the chain of distribution of the product, noting whether your client is involved in any part of the design, assembly, or preparation of the product. You will also want to familiarize yourself with your client’s relationship to the manufacturer and determine whether your client is a principal distributor of that manufacturer’s product. If so, your client could be exposed to strict liability for any injury caused by the product in Indiana if an Indiana court is unable to exercise jurisdiction over the manufacturer. If your client is purely a seller, and there is no issue with the court’s ability to obtain jurisdiction over the manufacturer, your client may be entitled to early dismissal of a plaintiff’s strict liability claim under the innocent seller statute.•

Jordan Slusher is an associate attorney at Kightlinger & Gray LLP and a member of the firm’s product liability practice group. Mr. Slusher is also publications chair for the product liability section of DTCI. The opinions expressed in this article are those of the author.