ver the years, I have been involved in a number of situations involving product liability issues arising out of the purchase or sale of a business or product line. In my experience, either the buying company (“buyer”) or the selling company (“seller”) does not perform adequate due diligence when analyzing risks. They always use experienced merger and acquisition counsel who can advise on how to structure the deal and generally the kind of due diligence that should be performed. But they rarely retain a product liability and product safety lawyer to help evaluate certain pre-transaction and post-transaction risks and make recommendations on the specifics of the sales contract.
This article will discuss this subject from the perspective of the buying company, as well as the selling company.
As the head product liability lawyer in a Fortune 500 company, I was periodically asked to evaluate a potential acquisition from a product liability standpoint. This usually just involved reviewing the list of product liability cases that have been brought against the company over the past few years. I was not asked to delve into the safety of a product and the way they did business to try to identify potential legal problems before they arose.
In addition, after I entered private practice, I served as an expert witness in litigation involving the acquisition of a manufacturer. Shortly after the acquisition, the buyer had to undertake a recall of the product. The buyer sued the seller and alleged that the seller hid the fact that the product would have to be recalled.
I represented the seller. While the buyer did use competent product liability counsel to help evaluate future product liability risks involving these products, I testified that this counsel did not see or appreciate disclosed information that would have indicated that a recall at some point in the future would need to be considered and possibly undertaken. I testified that the documentation that the seller provided to the buyer was sufficient to alert them to this possibility and that the seller was not hiding anything.
These experiences have made me sensitive to the necessity to be proactive during the due diligence process and to be sure that the buyer and seller understand the short-term and long-term risks of proceeding with the transaction and the ways that risk can be minimized.
No matter what analysis is performed pre-acquisition, it is possible that the buyer may assume liabilities that even the selling company is not aware of. And rarely are experienced product safety lawyers asked to audit a selling company’s product line or corporate structure to help determine if the products they have been selling are reasonably safe and have minimal risks.
So, in addition to reviewing the facts surrounding the disclosed incidents and lawsuits, product liability or product safety counsel, along with experienced safety professionals, should also review the design process, the warnings and instructions, the sales and purchase contracts for the product, the marketing, the insurance contracts in place, any recalls or safety campaigns that have been taken by the seller, and the product safety policies and procedures of the seller and the major suppliers to the seller applicable to safety-critical components or raw materials.
In the 1980s, Monsanto purchased G.D. Searle, a manufacturer of the Copper-7 IUD. Litigation against IUD manufacturers was just starting and expanding as there was other litigation involving the Dalkon Shield, an IUD made by A.H. Robins, which bankrupted the company. As a result of hundreds of lawsuits, G.D. Searle stopped the sales of this IUD in 1986. Given the Dalkon Shield litigation, you wonder why Monsanto wanted to buy an IUD manufacturer without doing significant research on the Copper-7 to confirm its safety.
Monsanto was also involved in another disastrous acquisition. This time, it was Bayer’s acquisition of Monsanto in 2018, which included its chemical product, Roundup. Roundup has been involved in significant litigation for many years, and Bayer has already paid $10 billion to settle earlier cases and has had to set aside almost $6 billion this year for pending cases. And individual liability verdicts are still occurring. In March of this year, a jury awarded $2.1 billion to a farmer who claimed that Roundup caused his cancer.
In all of these situations, a sophisticated company bought a product line that might have already had product liability issues. Or they failed to conduct adequate pre-acquisition analysis that would have enabled them to discover the risk of future litigation before the purchase. Competent lawyers surely helped structure these deals, but in the end, the acquiring company had to shoulder the sometimes-enormous financial burden.
If this audit is done, and the buyer still wants to proceed, they should plan for eventual litigation or safety issues arising in the future. So, there should be contractual provisions that will apply if there are lawsuits or recalls involving products manufactured by the seller. Most importantly, who is going to be responsible for new litigation and safety issues involving products manufactured pre-acquisition? Decisions must be made regarding who will retain the documents needed for defense, which personnel are required to handle the case and their employer affiliations, and whether the seller’s employees can provide assistance while remaining in the seller’s employ.
This audit should help the buyer decide whether to buy the company or product line, what kinds of improvements need to be made in the products or procedures for designing future products, and whether any recall or post-sale warning to consumers of the pre-acquisition products may be necessary.
I suspect that, in the majority of deals, the buyer will not assume liability for products sold by the seller. This is usually done by making it an asset purchase and not a complete purchase of the company. Despite doing this, there are ways for the courts to place liability on the buyer even though they did not make or sell the product involved in the purchase that injured someone. These theories place liability on the successor when there has been fraud in the sale of the business to get rid of liability or in cases in which the injured parties have no recourse against the seller since the seller is out of business and there is no one that will be responsible.
This means that the buyer should structure the deal so that the seller or its insurance company is available to compensate any deserving injured party. But even if this is done, the buyer needs to decide if it really wants to buy a company that has had lots of lawsuits and will have more lawsuits that will generate bad publicity. If the seller is responsible for defending cases involving its products, the buyer loses control over the handling of the litigation. Settlements or plaintiffs’ verdicts suffered by the seller could generate new lawsuits against the buyer, which would harm its reputation and business relationships.
Wouldn’t it be nice if manufacturers could sell the part of their business that had the biggest product liability risk and be done with it? Unfortunately, it is not that easy. If you can convince the buyer to assume all current and future risks, and if it is still in business and can adequately cover the risk when an incident occurs, then the seller will be protected.
However, since the buyer usually does not want to assume risks on products that were sold prior to the date of their acquisition, the seller may still have to defend cases on products it sold despite no longer owning the business. This raises serious potential problems for both buyers and sellers.
When I was in-house counsel, my company tried to sell a division that had lots of lawsuits. No one would buy it and assume responsibility for products manufactured prior to the acquisition. So, we kept the liability and were responsible for defending lawsuits for many years. Ultimately, my company recalled all of the products it manufactured. We experienced many of the serious problems discussed here.
The buyer will usually inherit the personnel, documents, and assets of the business that it acquires. As a result, the seller, who must defend pending and future cases it is responsible for, may not be able to defend itself easily.
After an acquisition, the buyer should immediately evaluate the quality and safety of the products it has acquired and make appropriate design or safety changes for future production. As a result, it is likely that there will be improvements in various aspects of the product, including the design, warnings, and instructions.
In reality, even if the buyer is not legally responsible for products sold before acquisition, the reputation of their products is a significant asset, and the buyer wants it protected. To obtain such protection, the buyer might decide to make a safety improvement and want to offer the improvement to prior customers. Or it may want to undertake a retrofit or recall of products in the field. In either case, the buyer will need the seller’s cooperation and maybe approval to make these improvements.
These kinds of activities by the buyer can create big problems for the seller as it attempts to defend pending lawsuits. One way to prove that the product was defective at the time of sale is to show that the manufacturer improved its manufacturing procedures or started to sell products with improved designs, warnings, and instructions sometime after the accident. Even though the buyer is a different company than the seller, the improvements show that they can be made, and that the successor company considered the improvements necessary.
There should also be an agreement about whether the buyer needs to consult with the seller before making significant changes in manufacturing and design, so the seller can at least be aware of it before it comes up in a lawsuit. Although the seller may not be able to stop a manufacturing or design change by the buyer, it should be allowed to provide input about the appropriateness of the changes and help the buyer assess any risks that arise from making these changes.
In addition, there should be some agreement about whether the buyer needs the seller’s permission before it reports a safety issue to the U.S. government or a foreign government entity and to undertake a recall. The matter of responsibility for the cost of any potential recall also needs to be discussed.
Of course, while all of these activities could seriously hamper the seller’s ability to defend its cases, they could also damage the buyer’s position in the marketplace and its ability to defend its future cases.
In addition to these agreements, the buyer and the seller should both agree to periodically discuss their litigation history and strategy. Adverse verdicts against one party will undermine the other’s ability to defend itself in future litigation as well. Also, without this coordination, there are likely to be inconsistent positions taken on the products that are being defended by both the buyer and seller.
