DTCI: IPLA’s domestic distributor rule: What is a principal distributor?

By Adam S. Ira

In an ever-more globalized economy, product liability actions increasingly involve overseas manufacturers of products that distribute those products in the United States through U.S.-based distributors. In a case involving an allegedly defective product manufactured outside the United States, the manufacturer may quickly file a motion to dismiss for lack of personal jurisdiction. Alternatively, it may be impossible to secure service upon an overseas manufacturer of a product. In either situation, an attorney who happens to represent a U.S. distributor of the product may be wondering if the U.S. client will be left holding the bag for a manufacturing defect (i.e., strict liability) if the manufacturer is dismissed. There are two situations in which this can happen.

First, if the U.S. distributor or seller also meets the definition of manufacturer, a strict liability action can still be brought against it. See Indiana Code § 34-20-2-3 (current through 2022). These exceptions to the rule are largely self-explanatory and are not the focus of this article. Second, if the court cannot acquire jurisdiction over the manufacturer, and the U.S. client is the “manufacturer’s principal distributor,” then it may stand in the shoes of the manufacturer under the Domestic Distributor Rule. I.C. § 34-20-2-4 (current through 2022).

On this point, the Indiana Product Liability Act provides as follows: “If a court is unable to hold jurisdiction over a particular manufacturer of a product or part of a product alleged to be defective, then that manufacturer’s principal distributor or seller over whom a court may hold jurisdiction shall be considered, for the purposes of this chapter, the manufacturer of the product.” I.C. § 34-20-2-4 (current through 2022).

Most often, the central dispute is whether a court is unable to hold jurisdiction over a particular manufacturer. The caselaw is well developed on the meaning of “unable to hold jurisdiction over a particular manufacturer.” However, there is remarkably little guidance on what constitutes “the manufacturer’s principal distributor or seller.”

The Legislature has not defined principal distributor. In addition, it appears from a plain reading of the statute that the rule contemplates imposing strict liability on the principal distributor or seller, as opposed to one of many such entities (more on this below).

The Indiana Supreme Court in Kennedy v. Guess, Inc., 806 N.E.2d 776 (Ind. 2004), provided early guidance on this issue in 2004. In Kennedy, one of the plaintiffs purchased a Guess brand watch and received a free umbrella bearing the “Guess” logo with her purchase. Id. at 779. About two years later, the plaintiff took the umbrella to work, where a co-worker swung the umbrella from its handle, and the shaft separated from the base, striking the plaintiff in the face. Id. The plaintiffs brought a product liability action against Guess Inc., Callanen International Inc. (the Connecticut company licensed by Guess to market products bearing the Guess logo), Interasia Bag Manufacturers Ltd. (Hong Kong-based manufacturer) and Interasian Resources Ltd. (New York-based affiliate of the manufacturer). The plaintiffs attempted but were unable to secure service on the manufacturer. Callanen and Guess Inc. moved for summary judgment, arguing they were not liable for the strict liability claims because they were neither “manufacturers” nor the “principal distributor or seller” of the umbrella within the meaning of the IPLA. Id. at 780.

The court began its analysis by determining that the plaintiffs adequately attempted service on the manufacturer. The court then turned to the question of whether Callanen and Guess were a “principal distributor” of the umbrella. The court began its analysis by noting the IPLA does not provide a definition of principal or distributor. The court examined the Black’s Law Dictionary definition of those terms: “Black’s Law Dictionary defines ‘principal’ as chief; leading; most important or considerable; primary; original. Black’s Law Dictionary 1210 (7th Edition 1999). ‘Distributor’ is defined 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.’ Black’s Law Dictionary 475–76 (6th Edition 1990).” Kennedy v. Guess, Inc., 806 N.E.2d 776, 782 (Ind. 2004).

With these definitions in mind, the court analyzed the history of transactions between Callanen and the manufacturer, finding Callanen had purchased more than 93,000 umbrellas from the manufacturer in 1996 (only 3,000 of which appeared to be Guess umbrellas). Id. at 782-83. The court also found that Callanen had purchased additional items from the manufacturer in 1996; the total sum of all purchases in 1996 was $617,000. Given this evidence, the Indiana Supreme Court found a genuine issue of material fact as to whether Callanen was “a” principal distributor of the manufacturer’s products. Id. at 783. The court found that Guess Inc. was not a seller or distributor of any sort. Id. Guess Inc. did not order, possess, manufacture, supply, distribute, design, assemble or sell the umbrellas in question. Id. As such, the Indiana Supreme Court affirmed the trial court’s grant of summary judgment in favor of Guess Inc. Id. It is important to note that, in the record, there was evidence only of how many products Callenen obtained from the manufacturer, and there was no evidence of how many of the same products the manufacturer distributed through other distributors. Thus, there was no context in which the court could analyze the significance of the number of products distributed by Callanen. Understandably, this led to a genuine issue of material fact.

At least one Indiana Court of Appeals case issued since the Kennedy case has suggested the domestic distributor must be the principal distributor of the manufacturer’s product. Warriner v. DC Marshall Jeep, 962 N.E.2d 1263, 1270 (Ind. Ct. App. 2012) (“To be held liable under the domestic distributor exception, the alleged distributor or seller must … be the ‘principal distributor or seller over whom the court can hold jurisdiction’) (emphasis added).

So, the Kennedy case tells attorneys what sort of facts can give rise to a genuine issue of material fact of whether a distributor is a “principal distributor,” but what is the legal standard to determine a “principal” distributor? The Kennedy court’s reference to Black’s Law Dictionary suggests principal means “chief; leading; most important or considerable; primary; original.” A search of Indiana caselaw reveals no further guidance.

As the Kennedy case suggests, the focus should be on the number of products distributed and the revenue generated for the manufacturer by sale to the distributor(s) in question. The inquiry is straightforward where there is simply one distributor in the U.S. But what if an overseas manufacturer’s products are distributed through, say, three U.S.-based distributors? Imagine Distributor A purchases 101 widgets per year and pays the manufacturer $100 to purchase the widgets ($0.99 per widget). Distributor B purchases 100 widgets per year and pays the manufacturer $200 for the widgets ($2 per widget). Distributor C purchases 50 widgets and pays the manufacturer $150 ($3 per widget). Which is the principal distributor?

None of the distributors move a clear majority of products or generate a clear majority of revenue for the manufacturer. Distributor A moves the most product. Distributor B moves almost as much product as A, but the manufacturer generates the most revenue from its sales to B. Distributor C moves the least amount of product but generates moderate revenue for the manufacturer. A good case can be made that Distributor A is the principal distributor because it moves the most product. However, Distributor B generates the most revenue for the manufacturer. Meanwhile, Distributor C moves the least amount of product but generates more revenue for the manufacturer than A. A court cannot hold all three distributors jointly as the “principal distributor,” as that would defeat the statute’s purpose of holding only the “manufacturer’s principal distributor or seller” liable. The issue is no clearer if Distributor C is removed from the above equation. Distributor A moves more product, but B generates more revenue for the manufacturer.

The simplest approach would be to base the determination on which distributor is responsible for a clear majority or plurality of widget purchases. Consideration should also be given to the number of widgets actually distributed in the relevant time period. The idea here is that the distributor that moves the most product is largely responsible for the presence of more of the subject products in the marketplace.

Another factor to consider is where the distributors distribute products. Often, distinct distributors cover particular geographic regions. Thus, it is possible a court may find that a smaller distributor could be the principal distributor in a given geographic region.

Finally, it is important to consider the requirement that the court be able to hold jurisdiction over the principal distributor. The statute specifically provides “that manufacturer’s principal distributor or seller over whom a court may hold jurisdiction shall be considered … the manufacturer of the product.” Obviously, if the court cannot hold jurisdiction over a party, it cannot be held liable. It is possible a plaintiff may argue that this provision means that the inquiry starts with those distributors over whom the court can exercise jurisdiction, then the court must determine which, among those distributors, is the “principal” distributor. This does not appear to be the approach the courts have taken, and such an approach would conflict with the purpose of the statute. As the Indiana Supreme Court stated in Kennedy: “It seems clear the legislature’s object was to provide a remedy for Indiana consumers who are injured by defective products manufactured by an overseas entity over which Indiana courts have no jurisdiction. Achieving this objective would hardly require imposing liability on all distributors, and the language chosen by the General Assembly creating an exception to the general policy against liability seems consistent with that fact. Ind. Code § 34–20 (‘that manufacturer’s principal distributor or seller’).” Kennedy, 806 N.E.2d at 782.

Starting the inquiry with those distributors over whom the court can exercise jurisdiction would effectively expose all distributors to liability (e.g., a small distributor that distributes a single widget could fit within this broad reading of the statute). Thus, the logical reading of the statute is that only the principal distributor can be substituted for the manufacturer, and it can be held liable only if the court can exercise jurisdiction over it.

While we have some guidance from the Kennedy case, it seems that the issue of what constitutes a “principal distributor” is ripe for the courts to clarify. Given that the consequences are significant in deeming a seller or distributor the “manufacturer” (i.e., imposing strict liability for a manufacturing defect for a product in which the distributor played no role in designing or manufacturing), the burden for imposing such strict liability should likewise be significant.•

Adam S. Ira is a senior associate in the Indianapolis office of Frost Brown Todd LLC and is a member DTCI. Opinions expressed are those of the author.