Tuesday, August 3, 2010

Obstacles Can Be Good: South Carolina Supreme Court Affirms Trial Court’s Grant of Summary Judgment on Preemption Grounds in Products Case

Obstacles can be good, especially when they represent preemption defenses against state products liability claims. As we reported yesterday, the South Carolina Supreme Court issued a decision that Federal Motor Vehicle Standard 205 preempts a state claim. Standard 205 deals with glass used in vehicles. The lawsuit sprung from an automobile accident in which an occupant of a Ford F-150 was thrown from the cab. The personal representative filed suit, alleging the Ford should have used glass that would not shatter and would “retain occupants inside the vehicle.” Ford argued that Regulation 205 permitted discretion in which glass to use, and, therefore, the state law claim was preempted.

The South Carolina Supreme Court affirmed the trial court’s order granting Ford summary judgment. The legal issue was whether Regulation 205 merely sets a minimum safety floor (no preemption) or permits the manufacturer a range of choice in the production of its vehicles (preemption). Regulation 205 begins as follows:

S1. Scope. This standard specifies requirements for glazing materials for use in motor vehicles and motor vehicle equipment.
S2.Purpose. The purpose of this standard is to reduce injuries resulting from impact to glazing surfaces, to ensure a necessary degree of transparency in motor vehicle windows for driver visibility, and to minimize the possibility of occupants being thrown through the vehicle windows in collisions.

The court noted that Regulation 205 does not specify standards for which glass to use, but instead it references a safety code (ANS Z26) developed by the American National Standards Institute, a nonprofit entity. The code allows two different types of glass: 1) a tempered glass that shatters into dull pieces (safer for restrained occupants) and 2) a laminated glass that does not shatter (safer for unrestrained occupants by decreasing risk of ejection.

Important to the Court’s analysis was the National Highway Traffic Safety Administration’s withdrawal of a proposed rulemaking. The NHTSA contemplated authoring rules in the early 1990s requiring laminated glass to be used for side windows in vehicles. After studying the matter, the NHTSA withdrew its advanced notice of proposed rulemaking, and cited its study that the use of laminated glass increased the chances of injury to restrained occupants. See Notice of Withdrawal, 67 Fed. Reg. 41,365. The Court then examined three recent opinions from the Fifth Circuit, the West Virginia Supreme court, and the Tennessee Court of Appeals examining the potential preemption of Regulation 205. The state court opinions were driven by Geier v. Am. Honda Motor Co., Inc., 529 U.S. 861 (2000), which found that Regulation 208 had preemptive effect. Following the state court decisions, it seems that the NHTSA’s withdrawal was the crucial factor:

In issuing the notice of withdrawal, NHTSA declined to modify Regulation 205 and require advanced glazing. Thus, the notice of withdrawal kept Regulation 205 intact, thereby preserving the manufacturer’s option to use tempered glass on side windows.

Because the federal government authorized that choice, Regulation 205 must preempt a state claim. Note, however, that the Court footnoted the Foreword to ANS Z26, which does not support a finding of preemption, but the Foreword “is not part of” ANS Z26.

The Fifth Circuit decision in O’Hara v. General Motors Corp., 508 F.3d 753 (2007) went the other way. O’Hara reasoned that the NHTSA’s notice of withdrawal did not operate as a rejection of laminate glass in side windows. Moreover, the language of Regulation 208 “strongly supports the conclusion that it expresses a federal policy,” while Regulation 205 did not. Therefore, Regulation 205 was best understood as a minimum safety standard, leaving states free to regulate via tort.

The South Carolina Supreme Court footnoted multiple cases in which courts have dealt with the preemptive effect of Regulation 205. Although it seems both sides have valid arguments, there is the underlying current of rewarding risky behavior in not finding preemption. That is, laminate glass can protect unrestrained occupants from being ejected from a vehicle. Does a court really want to reward a risk-taking plaintiff by denying a defendant the defense of preemption. O’Hara involved the claims of a minor, so perhaps she was a more sympathetic plaintiff. At any rate, be aware of the split of authority, and look for the United States Supreme Court to take a Regulation 205 case on certiorari.

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Monday, August 2, 2010

South Carolina Supreme Court Finds Products Liability Claim Preempted by Federal Motor Vehicle Standard 205

This morning, the South Carolina Supreme Court issued an opinion in Priester v. Ford Motor Co., Op. No. 26846 (S.C. August 2, 2010), in which it ruled that a state law products liability claim is preempted by Federal Motor Vehicle Standard 205 (49 C.F.R. § 571.205). After examining the current split of persuasive authority, the Court ruled that the regulation provides a “range of choices among” different types of glass that could be used in a vehicle, rather than a minimum safety standard. Thus, the Supreme Court affirmed the trial court, which had granted Ford’s motion for summary judgment on those grounds. We’ll write up a full analysis of this decision for tomorrow’s post.
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Will you please assume my liability?

Several weeks ago, the defendant in Altman v. Motion Water Sports, Inc., No. 3:07-cv-01383, 2010 WL 2747306 (D. Conn. July 12, 2010), asked the District of Connecticut to grant its motion for summary judgment finding that it, as a successor corporation, is not liable to plaintiff for his injuries from a defective product that it neither manufactured nor sold to plaintiff. The Court denied defendant’s motion, providing some insight into the law of Connecticut on successor liability.

Plaintiff, Russell Altman (“Altman”), purchased water skis from Earth and Winter Sports, Inc. (“EWS”) some time prior to March 28, 2003. On this date, EWS sold all of its assets to Motion Ocean Sports, Inc. (“MOS”). The purchase agreement between EWS and MOS expressly provided that MOS did not assume any liabilities of EOS. Further, there was no continuity of stock, stockholders, or directors. On the other hand, after the MOS purchased EWS’s assets, MOS continued to manufacture the same products, under the same names; took over the EWS factory; and hired approximately 50 of EWS’s former employees.

After the take-over, on July 21, 2004, Altman fell while water skiing and one of the skis failed to release from his foot. Altman alleged permanent physical injuries arguing that the ski was defective in several respects. Thereafter, Altman filed suit against MOS to recover for his injuries. In response, MOS moved for summary judgment on the ground that “under a general common law rule relating to corporations, a purchaser of the assets of a corporate business is not liable for the debts and liabilities of the previous owner of those assets.” Altman’s arguments in opposition to MOS’s motion included an argument that certain exceptions to the common law rule against asset-purchaser liability applied in this situation. See this opinion for all the other grounds Altman asserted in opposition of MOS’s motion.

The general rule is that “a corporation which purchases all the assets of another company does not become liable for the debts and liabilities of its predecessor unless (1) the purchase agreement expressly or impliedly so provides; (2) there was a merger or consolidation of the two firms; (3) the purchaser is a ‘mere continuation’ of the seller; or (4) the transaction was entered into fraudulently for the purpose of escaping liability.” Ricciardello v. J.W. Gant & Co., 717 F. Supp. 56 (D. Conn. 1989). Altman relied upon the third exception and argued that MOS was a mere continuation of EWS.

Within the “mere continuation” exception, the Court identified several different theories. The first is the so-called common law exception. Under this theory, the Court found that MOS was entitled to summary judgment because there was no transfer of corporate stock between the two companies and there was a total lack of continuity of shareholders and directors. Next, the Court stated that the continuity-of-enterprise theory applies where “the successor maintains the same business, with the same employees doing the same jobs, under the same supervisors, working conditions, and production processes, and produces the same products for the same customers.” The Court found that MOS did many of these things and that Altman was entitled to full discovery on this theory.

The final theory was the “product line” exception to the rule against successor liability. The Court noted that unlike the other two theories which were widely accepted in Connecticut, no Connecticut appellate court had considered the product-line theory. After considering the decisions of Superior Courts that have considered this theory, the Altman Court stated that since this theory was more consistent with the consumer-protection goals of the Connecticut Products Liability Act, he was entitled to invoke this exception and engage in full discovery on its applicability.

This case shows that there are not merely four exceptions to the rule against successor liability but theories within those exceptions that are being continually argued. If a corporation, such as MOS, takes over the assets of another corporation, it should be aware of these exceptions and ensure that their practices would not allow a plaintiff to successfully argue successor liability.
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