Contents

Editorial........................................................................................................................................................12007: a turning point for product safety?......................................................................................................3The bitter aftertaste of chocolate contamination..........................................................................................5The trials and tribulations of importing foodstuffs.........................................................................................7A problematic diagnosis - causation in medical product liability claims.......................................................9Total recall: the real cost of product recalls................................................................................................11Recent cases on defective products within The Consumer Protection Act 1987.......................................13Product liability - a Chinese perspective....................................................................................................15Consumer redress and ‘class actions’........................................................................................................17DRI – the voice of the defence bar.............................................................................................................18BLM international product network.............................................................................................................18

Editorial

Since the inaugural edition of Brand news, product liability issues have continued to create headlines. Notably, the Salmonella contamination in Cadbury’s chocolate led to a product recall of more than 1 million bars with associated costs of £15m, £20m for safety modifications to the plant and a £1m fine - plus the consequence of reputational damage to Cadbury’s previously excellent brand.

Another recall involved over 20 million Mattel toys containing high levels of lead paint. This recall, which followed similar incidents involving other products manufactured in China, highlights that damage to reputation may not be limited to a particular company or producer but affect a country - creating the impression of lax safety standards.

The above demonstrate that the nature of product liability law often involves multi-jurisdictional issues eg a product could be manufactured in one country, modified in another, sold in a third and go on to cause damage in a fourth jurisdiction. Protecting clients’ interests requires an established global network of expert product liability lawyers liaising to deliver an efficient, reliable and coordinated approach. BLM is active in such a network and one of the member law firms has contributed an interesting article on page 14.

Damage or loss affecting consumers often involves a class or group action. The potential for a class action underscores the importance of mounting a concerted response by defence lawyers. This is best illustrated in the US, where the Defence Research Institute (The Voice of the Defence Bar - DRI) is very active advising defence trial lawyers and corporate counsel on areas such as class actions brought before the courts.

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May 2008 - edition 2

This edition covers problems with importing foodstuffs, what constitutes ‘a defect’ under the Consumer Protection Act in the UK and the complex issue of causation in relation to medical product liability claims involving a drug or device as a defective product (illustrated by the MMR vaccine scare).

We trust that you will find edition 2 informative and pragmatic. If you wish to discuss any product liability issue covered in this edition (or otherwise), please do not hesitate to contact us.

Mark BensonPartner, BLM Manchestermark.benson@blm-law.com

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2007: a turning point for product safety?

The latest EU statistics confirm that product recalls are not only a worldwide problem but are increasing year on year. According to the latest annual report by RAPEX (the Rapid Alert System for non-food consumer products), published on 17 April 2008, there were 53% more notifications in 2007 than in 2006. However, European Commissioner for Consumers, Meglena Kuneva, insists that ‘2007 will mark the turning point for global product safety’ and highlights growing international co-operation with China as the key to ensuring the safety of low quality, low cost mass produced products from the Far East.

So what will be the impact for insurers? Does this figure reflect an increase in risks to consumers from dangerous products? Or is the increase a reflection of the significant growth in regulatory and enforcement activity in recent years? While Ms Kuneva may conduct heavily publicised trips to China to highlight concerns as to the safety of Chinese manufactured products exported to EU markets, how can insurers hope to protect their position when the prospects of recourse in the Far East remain poor? Will 2007 see the turning point not only for consumers but also for insurers who end up bearing the cost?

The statistics show the significant proportion of recalls relating to products manufactured in the Far East. In 2007, 700 RAPEX notifications concerned products of Chinese origin, including Hong Kong. This figure corresponds to 52% of all notifications and confirms the growth of dangerous products made in China and marketed in Europe as compared to data from 2006. In October 2007, there was an all time high of 179 RAPEX notifications and during the same month 69% of all Article 12 notifications (ie measures or actions taken for products representing a serious risk) concerned Chinese products.

Inevitably the publicity in August 2007 concerning Mattel’s decision to announce a major worldwide recall of some of its Fisher Price toys led to press attention focussing on Chinese manufacturers. Other press complaints followed involving recall announcements by Nokia and Asda. Similarly, there has been press attention focussed on leather sofas manufactured in China which, it was alleged, caused contact dermatitis. However, before concluding that the safety of Chinese manufactured goods is declining, it is worth considering the level of trade with the Far East and the developing regulatory regime.

For example, it is important to bear in mind that almost 80% of all toys on the European market are imported from China. It is also notable that toys alone accounted for almost one third of notifications in 2007 with the next highest class of notification being motor vehicles (15%) followed by electrical appliances (12%). It is quite clear that child safety is (rightly) the top ranking priority for market surveillance authorities and while this proportion of output may not be reflected across other industries, there is no doubt that China is the source of significant proportions of components and products. It is no real surprise that this proportion is reflected in the number of notifications.

There is no evidence to suggest that there is an increase in risk to consumers from dangerous products. In fact, there has been a significant increase in regulation and enforcement within the EU – there is little doubt that EU product safety regulations are, in many sectors, by far the strictest in the world.

The EU Directive on general product safety (2001/95/EC) has produced significant tightening of the regulatory regime and the sanctions which can be imposed, implemented in the UK by the General Product Safety Regulations 2005. The Directive provides the legal framework for RAPEX which is used to exchange information on dangerous non-food consumer products, particularly those governed by ‘sectoral’ directives, for example, toys, cosmetics, electrical appliances, motor vehicles and machinery. This is because most of the specific ‘sectoral’ provisions do not provide for a similar rapid information exchange system which has changed the landscape in terms of information on dangerous products within the EC, not least in identifying themes relating to the origins of the products.

Interestingly, the RAPEX statistics also illustrate growing awareness of the Regulations by producers and retailers within the EU. Compared to 2006, there was an increase in the proportion of notifications concerning voluntary measures taken by the retailer/producer from 41% in 2006 to 50% in 2007. The levels of compulsory and voluntary measures respectively are now almost equal, confirming that the Directive is increasingly successful in forcing retailers/producers to act swiftly without pressure from regulators.

The EC claims that the exchange of RAPEX information with China has revealed ‘tremendous capacity and potential for improving product safety upstream in the supply chain’. The Commission is assisting the Chinese authorities in setting up their own domestic alert system, similar to the European RAPEX, whilst increased co-operation has, apparently, already ‘yielded tangible results in terms of control and measures taken against unsafe products of Chinese origin found in Europe’.

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On a formal diplomatic level, the EC claims increased constructive co-operation with the Chinese product safety administration under the Memorandum of Understanding between the Health and Consumer Protection Directorate - General and the Chinese General Administration for Quality Supervision, Inspection and Quarantine (AQSIQ) signed in 2006. The information obtained via RAPEX is systematically fed to AQSIQ and communication at expert level is also noted in the annual report, pursuing the commendable objective stated in the memorandum that ‘a high level of product safety is key to consumer confidence and reciprocal trade’ (point 28 of the Joint Statement issued during the tenth China-EU summit held in Beijing on 28 November 2007).

So where does all this laudable activity leave insurers? Can point 28 of the joint statement be quoted when seeking to persuade Chinese manufacturers to accept responsibility for defective goods which have resulted in loss? The reality is that while the stricter regulatory controls and information gathering will provide a basis for pressing any mass producer of low quality unbranded goods to improve standards, in the short term a sensible strategy to mitigate risk is still required.

Supplier audits and controls are the key – the processes in place to ensure quality standards between manufacturer and distributor will provide some security. Local representation and knowledge is also a requisite. As BLM’s associate lawyers based in China report elsewhere in this edition, an understanding of the local procedure (and the cultural issues) is critical to any prospect of successfully pursuing claims in the Far East. Financial pressures will in time force up quality assurance and quality control so that companies sourcing products from China can be insurable.

Inevitably, it is likely that product recalls will continue to rise in the immediate future. The Directive has undoubtedly changed product recall risks in Europe and while figures from Trading Standards regulators in terms of compulsory measures and prosecutions are still difficult to obtain, there is no doubt that the threat of action from regulators in accordance with the Directive has caused retailers/producers to review their obligations. Whether 2007 will indeed be a turning point is far from clear. What is clear is that despite the talk of increased co-operation at a high level, insurers will need to continue paying close regard to the assessment of risk and the need for local representation.

Jim SherwoodPartner, BLM London

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The bitter aftertaste of chocolate contamination

In January 2006, Shaun Garratty, a staff nurse from Rotherham first started to suffer from the symptoms of food poisoning. Prior to his illness he was a regular sportsman either hiking, mountain biking orswimming twice a week. As sustenance, he took with him two bars of chocolate, both manufactured by Cadbury’s.

At the time Mr Garratty first became ill with suspected food poisoning, he was taking antibiotics for a chest infection and his GP thought initially that there was a connection between that medication and his symptoms.

By March 2006 Shaun Garratty had lost three stone, he was rushed to hospital after collapsing at home. He was subsequently diagnosed as suffering from a rare form of Salmonella which in the UK could only be linked to contaminated chocolate crumbs used by Cadbury’s. Mr Garratty spent seven weeks in hospital and some ten months after his initial symptoms was still suffering from the effects of Salmonella Montevideo so pursued a claim against Cadbury’s.

Cadbury’s Schweppes Plc has been making chocolate for 183 years, the company having been founded in 1824. Prior to this incident the company had a solid international reputation as a manufacturer of confectionary.

Salmonella was first discovered by Cadbury’s staff on 19 January 2006 at its Marlbrook factory in Herefordshire. A leaking pipe at the factory led to chocolate mix becoming contaminated. Factory managers decided to carry on with production on the basis that contamination levels were minimal, and so they thought that there was no threat to consumers.

The Food Safety Act 1990 provides that in the event of any contamination, companies must withdraw food from the market place and inform all relevant authorities. It was not until some five months after the problem was initially discovered by Cadbury’s staff that the Food Standards Agency (FSA) was notified. In the meantime, officials working for the Health Protection Agency noticed a sudden rise in a number of persons contracting Salmonella Montevideo. In 2005 there were only 14 reported cases in contrast to the period between January – June 2006 when over 53 cases were reported.

In June 2006 Cadbury’s undertook a large scale product recall. In excess of one million bars of chocolate were removed from retailers, the company making arrangements to bury some 250 tonnes of chocolate. There then followed a lengthy investigation by officers from the FSA and environmental health officers from the relevant local authorities. The investigation culminated in summonses being issued with the case being heard at Birmingham Crown Court on 16 July 2007. The company entered pleas of guilty to nine offences relating to the sale of food which was unfit for human consumption and failing to notify the FSA of the contamination problems it was experiencing at its Herefordshire factory. Fines totalling £1m were imposed together with costs of £152,000. The judge was told that the company had spent £15m in recalling contaminated chocolate and a further £20m in carrying out safety modification.

The judge did not accept the prosecution’s submissions that the Salmonella outbreak had arisen because the company had introduced a new system of testing its products in an endeavour to save money. In sentencing the company the judge, recorder Guthrie QC, described the offences as having arisen due to ‘a serious case of negligence’ and said, ‘It therefore needs to be marked as such to emphasise the responsibility and care which the law requires of a company in Cadbury’s position’. He added that the new testing system which had been introduced by the company was ‘Badly flawed and wrong’.

In imposing sentence the judge will have taken into account both aggravating and mitigating features. Examples of aggravating features in connection with this case are that the company did not notify the relevant authorities until June 2006 despite being aware that there was a problem in January of that year; the company had introduced a new, flawed testing system; the serious level of the contamination, in total some 42 people including Mr Garratty became ill as a result of eating the contaminated chocolate. Mitigating factors taken into account by the court included the company’s early plea of guilty, together with the company’s good reputation and the fact that the offences had not arisen as the result of a desire to save money.

The fine imposed at Birmingham CC was one of the largest fines for breaches of food safety legislation. The magnitude of the fine can be largely attributed to the company’s high profile and profitability and their

failure to take immediate steps to notify the authorities and to recall the relevant products.

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The fact that Cadbury’s failed to take all of these steps until months after being made aware of the initial problem undoubtedly had a bearing on the court’s final decision when imposing a sentence.

The serious nature of breaches of food safety legislation was also illustrated by the prosecution in September 2007 of William Tudor of John Tudor & Sons. Mr Tudor, a butcher, was jailed at Cardiff Crown Court for 12 months after having pleaded guilty to seven offences relating to the supply of meat contaminated with E.coli to schools. As a result of an outbreak of E.coli amongst school children, one child died. In commenting upon the case, the FSA stated ‘Putting public health first must be paramount for all food businesses’. A public enquiry is currently being held into the causes of the South Wales E.coli outbreak.

Visit the FSA website at www.food.gov.uk for a list of all recent and archived product recalls. Already during 2008 there have been a number of product recalls including Walker’s Crisps (rubber contamination), Sainsbury’s Hollandaise sauce (glass contamination) and Imperial Snack Foods Limited – premier quality seed mix (Salmonella). Despite the Cadbury’s case, manufacturers appear to be more aware of the importance of timely product recalls in order to avoid delay, as in Cadbury’s.

The increasing number of product recalls in the food sector is demonstrated by the fact that the figures increased by a fifth in 2007. This can be attributed to a need felt by companies to protect their commercial reputation, together with the threat of legal sanction. Withdrawal of food products remain at a high level, this being in line with EU figures showing that product recalls average 18 per week, as opposed to four per month some 18 months previously. This increase in product recalls illustrates the need for good quality control and due diligence systems bearing in mind the difficulties raised in monitoring and maintaining quality controls in respect of goods sourced from outside the EU. Data over the last 12 months indicates that approximately half of the recalled products originated from China. Given the ever increasing inclination of consumers to engage in litigation coupled with court powers to impose significant financial penalties, the importance of maintaining high levels of vigilance in this area cannot be underestimated.

Françoise SnapePartner, BLM Birmingham

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The trials and tribulations of importing foodstuffs

Take a moment to consider the following statements and then decide whether they are true or false:

A food supplier is not accountable if it ensures that non-permitted food additives are not deliberately added to their products.

A supplier is not liable if non permitted food additives, which had been added to its food supplies by mistake, do not create a risk to the health of members of the public.

So long as the level of contamination is minute and does not make the food unacceptable for human consumption, the supplier is in the clear.

If you answered ‘true’ to any of the above you would be wrong. Or certainly according to the case of Hazlewood Grocery Limited v Lion Foods Limited (2007) QBD (Leeds).

If you are a supplier of foodstuffs, a manufacturer, or are involved in the food industry in general, this decision is highly relevant to you as it imposed a severe liability on food suppliers for the products that they supply.

Furthermore, this case is useful as it considered such important issues as breach of contract, food safety/contamination, genotoxic carcinogens, satisfactory quality, The Colour in Food Regulations 1995, EC Regulation 178/2002, sections 13 and 14 of the Sale of Goods Act 1979 (as amended) and the duties of the Food Standards Agency (FSA). The implications of this important decision are discussed below.

Facts

Briefly, the claim is that Hazlewood Grocery Limited (Hazlewood), the claimant, sought damages from Lion Foods Limited (Lion), the defendant, in respect of Hazlewood’s discovery in 2005 that about 1000kg of chilli powder supplied to it by Lion was contaminated with industrial dye called ‘Para Red’ – as many of you will immediately be aware, this case has striking similarities to the ‘Sudan 1’ chilli powder product recalls in 2003 and 2005. Para Red, like Sudan 1, is a suspected genotoxic carcinogen and is, therefore, not on the ‘positive’ list according to the European Parliament and Council Directive 94/36/EC on colours for use in foodstuffs (as subsequently amended), and The Colour in Food Regulations 1995 (as subsequently amended); as such it is not permitted in foods.

Consequently, the FSA quarantined the chilli powder and the food that Hazlewood had incorporated it into, and demanded a recall. The FSA also posted a list of 23 affected products from Hazlewood on its website. However, shortly after this, the European Community committee met with the FSA and the FSA changed its stance to say that it only required the recall of food that contained a level of dye in excess of a specified amount (ie in excess of 500 ppb). This level was considerably higher than the amount found in Lion’s chilli powder (120-240 ppb) but by then it was too late as Hazlewood claimed that it had already suffered substantial losses, given the recall, the negative publicity generated, and the overall exposure to the public of this issue.

Outcome

John Behrens QC presided over this case and held that the implied terms of the contract were that the chilli powder at the time of sale should be:

reasonably fit for its purpose, namely use in the manufacture of food products in all respects suitable to be sold on to the general public in accordance with their description of satisfactory quality.

Responding to Hazlewood’s allegation that Lion was in breach of The Colour in Food Regulations 1995, the court found that the wording of Regulation 7(4) was clear (ie ‘no person shall sell any food having in it or on it any added colour other than a permitted colour …’), and as Para Red was not a permitted colour it mattered not whether it was added adventitiously or deliberately. Nor did it matter that the amount was so small that it was undetectable by HPLC methodology. Therefore, the presence of the illegal dye in the food constituted a breach of the regulations. However, there was some comfort for Lion. Even though the court was not required to consider whether in fact the dye had been added deliberately or not, it found that there was insufficient evidence to

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determine how the batch became contaminated, and also found that Hazlewood had not proved that Para Red was added deliberately to the chilli powder.

Furthermore, the court found that Lion had not breached Article 14 of the EC Regulation 178/2002. This was because all the experts in the case had agreed that the chilli powder was not injurious to health within the meaning of this regulation, and in John Behrans QC’s view, therefore, the level of contamination did not make the food unacceptable for human consumption.

Ultimately, this did not assist Lion as the court held that the existence of Para Red in the chilli meant that it contained ‘foreign or extraneous matter’ contrary to the Raw Material Specification, as it was not there naturally and was not supposed to be there. Perhaps understandably, the court did not accept Lion’s argument that the term ‘foreign or extraneous matter’ more correctly referred to glass, metal, packaging fragments etc or objects visible to the naked eye, and not to Para Red. Perhaps the court’s view is clearly the correct interpretation of this common term. Having interpreted the meaning of ‘foreign and extraneous matter’, the court went on to consider whether the chilli was ‘free from’ foreign or extraneous matter. The court again found in Hazlewood’s favour and stated that the chilli was not absolutely free from foreign or extraneous matter, despite Lion’s assertions that scientifically no matter can be absolutely ‘free from’ something.

The court also held that there were breaches of sections 14(2) and (3) of the Sale of Goods Act by Lion. This was because:

the sale of the chilli contaminated with measurable quantities of Para Red was not reasonably fit for its purpose when sold because products manufactured from it were liable to be posted on the FSA website and to be subject to recall as a result of advice or instruction from the FSA.

Crucially, at the date of sale the FSA’s attitude was one of zero tolerance and it did not matter that the FSA subsequently relaxed its guidance; this zero tolerance attitude was in line with other European countries at that time and was not unreasonable. It also followed, therefore, that a reasonable person would not regard the chilli to be satisfactory for the same reasons stated.

At the trial, Lion was critical of the FSA’s initial stance, and subsequent change of stance, and argued that the level of Para Red was extremely low, that it would be further substantially diluted in any manufactured product, and that contamination at this low level could only be adventitious. Furthermore, there was a body of opinion in the food industry which found the FSA approach to these very low levels to be unreasonable. However, John Behrens QC refused to agree with this and found the FSA’s stance to be reasonable in the circumstances.

What does this mean for suppliers?

Despite there being some sympathy for Lion given that the levels of Para Red were minute and that the chilli was not harmful to the public, the court still found Lion liable. This is a stern warning to all suppliers to ensure that they carry out appropriate checks on all products/imports, because a manufacturer bringing a claim against a supplier will succeed even if it does not prove that the contaminant was added deliberately or that it was injurious to health.

Indeed, it will also not be a defence to a supplier to assert that the food is fit for human consumption, and this may just set some alarm bells ringing in the food industry. This case also highlights the need to be acutely aware of exactly what the FSA levels or guidelines for a particular contaminant are, or what its approach is to a certain illegal dye, at the date of sale as it is irrelevant if the FSA’s later approach appears heavy-handed or if it changes its stance during a crisis.

Simon LambethAssociate, BLM London

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A problematic diagnosis - causation in medical product liability claims

Causation is a crucial but relatively simple issue in most product liability claims. It is easy to see the causal link between faulty brakes on a car and a claimant’s whiplash injuries arising from a road traffic accident. In product liability claims involving medical equipment or procedures, however, the issues can become clouded with a fog of medical jargon, statistics and lack of a definitive scientific explanation.

Causation - the basics

All product liability claims require the claimant to prove causation, whether the action is in negligence, breach of contract or under the Consumer Protection Act 1987. This was confirmed by Foster v Biosil [2001] 59 BMLR 178, a claim concerning allegedly defective silicone breast implants. The claimant attempted to argue that to succeed she merely had to show that the implants had failed in a manner which was unsafe and contrary to what she was entitled to expect. This was rejected by the court which confirmed that a claimant must prove both a defect and causation. The Consumer Protection Act did not amend the burden of proof in respect of causation.

The issue of causation is usually characterised as the ‘but for’ test ie that the damage would not have occurred but for the defendant’s actions. In certain cases though (specifically occupational disease claims), where current scientific knowledge is unable to definitively prove that the defendant’s actions caused the injury, the courts have been willing to find it sufficient for the claimant to show that the defendant’s actions made a material contribution to the damage. This approach has yet to be applied in a product liability scenario.

The complicating factors

Many of the difficulties arising with medical product liability cases are due to the limitations of current scientific knowledge. A fact highlighted by the recent collapse of the group litigation regarding MMR vaccinations and the alleged connection with the development of autism. If the scientific community is unable to agree on the cause of a medical condition or illness it is inevitably an up-hill struggle for a claimant attempting to link their condition with a treatment or drug.

There are often numerous environmental and constitutional factors which could influence or impact on the development of a disease or illness, and the defendants alleged defective product will be only one. Not only that but the claimant will have to show that the illness is not an underlying consequence of the original problem which resulted in the received medical treatment. The likelihood of the defect contributing to the alleged symptoms is also likely to be subject to varying expert opinion with no definitive scientific opinion.

XYZ and others v Schering Health Care Ltd [2002] EWHC 1420 involved the use of 10 expert epidemiologists to attempt to demonstrate whether or not there was a statistical association between the use of certain oral contraceptives and the development of conditions such as deep vein thrombosis or pulmonary embolisms. The opinion of the experts and the manner in which they approached the claim varied but all relied on complicated statistical analysis, which even the judge struggled to understand on occasion. Ultimately the court concluded after consideration of the numerous case studies that there was not as a matter of probability any increased relative risk carried by the oral contraceptives concerned in the litigation when compared to other products on the market.

Similarly in the matter of Piper v JRI (Manufacturing) Ltd [2006] EWCA Civ 1344 the claimant failed to establish liability in a case involving a hip replacement which broke some 18 months after it had been fitted. Despite the presence of defects found on the hip prosthesis the expert metallurgist was unable to indentify the fracture crack which had caused the prosthesis to break, and it was inconclusive as to whether such a crack was created in the manufacturing process or during implantation. As a result the claim failed both at first instance and on appeal. This decision was in part based on the defendant’s good quality control systems which had resulted in just nine complaints over 80,000 prostheses.

Conclusion

The number of successful product liability claims arising from medical treatment has remained small with the only notable success arising from the litigation over Hepatitis C contaminated blood products (A v National Blood Authority [2001] 3 All ER 289). No doubt further cases of this nature will arise over the next few years and it will be interesting to see how the courts develop this issue. For those involved,

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however, it will be an expensive learning experience as the costs in these cases reflect the complicated medical issues involved. It is reported that over £10m was incurred on the discontinued MMR vaccine litigation alone. Claire OpacicSolicitor, BLM Manchester

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Total recall: the real cost of product recalls

The steady growth in the number of product recalls over recent years will have prompted many businesses to review their plans for handling such an incident. Recent high profile examples involving Cadbury’s (Salmonella found in chocolate bars) and Mattel (the use of paint containing lead in children’s toys), illustrate how costly and damaging a recall campaign can be. To what extent could those costs be insured against, or recovered from third parties such as the component supplier? Are systems in place to track costs in order to support their recovery from suppliers and insurers?

Estimating the real impact

The impact of a product recall is both short and long term. Attention is initially focussed on recovery, disposal and replacement of affected goods. Action taken during this critical period may continue to affect the success of the brand over the long term.

In addition to the obvious expense of the product’s withdrawal from sale other costs mount up:

Management time Managing the recall and quantifying costs for recovery can take up substantial internal resources.

Repair and replacement of affected items An ordinary product liability policy does not cover the cost of rectifying defective stock, only the damage resulting from such defects.

Customer claims Customers who have had to remove stock from shelves or gather information about the destination of affected products may make claims for the affect of the recall on their own business. Potentially of greater concern are customers who have ‘own branded’ the goods, who may intimate a claim for the cost of averting or repairing damage to their brand image (for example by way of additional advertising, promotion and public relations).

Falling demand The short term negative sentiment generated by the recall – which may be felt across other product lines – ultimately affects the bottom line. The effect of a brand or business being associated with a serious recall may last for years, though measuring the impact may be difficult.

External professional fees Some industries will typically involve external scientific or technical analysts to progress enquiries into the root cause of the fault. Legal advice may be sought on the regulatory framework and how best to limit potential liabilities and to ensure costs are recovered. The scale of the recall may justify professional crisis management and media liaison advice.

Insuring product recall costs

Standard product liability policies exclude the costs arising from a product recall though limited coverage is often available as a policy extension. The alternative is to investigate one of the increasing number of specialist recall policies on offer which are more likely to offer a broader scope of cover at an increased premium. Some insurers may offer assistance with risk management and contingency planning to mitigate the impact of a recall. The insurance options should be carefully reviewed when recall contingency plans are prepared and the potential cost analysed.

The reality is that it is impossible to find insurance to cover all costs arising from every potential scenario. An analysis of the industry-specific risks should highlight those costs which can be internalised in the short term (and perhaps ultimately passed on to suppliers) and the substantial costs which are most likely to threaten the long term interests of the brand or business. An informed comparison can then be made of the cover on offer which will vary as to:

What types of event trigger the recall Some policies (frequently those designed for the food industry) specifically cover recalls arising from contamination but not other problems which may prompt a recall.

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Insured and excluded costs Since the financial impact of a recall is widespread, insurers are careful to define the types of expense recoverable under the policy.

The financial limit of cover and size of deductible – which will have a significant bearing on the premium.

Reclaiming costs from suppliers and others

Most reputable suppliers will co-operate when problems are traced back up a supply chain, not least because a recall of their component or ingredient may be triggered. Few though will simply concede legal liability when the costs which flow can be so substantial, and many hurdles potentially lie in the way of making a successful recovery.

Good management of the conditions on which goods are acquired (for example ensuring that purchase order terms are effectively incorporated) may prove decisive. Internal accounting for the costs generated by the recall will ensure that the true loss is pursued and will avoid difficulties later when trying to evidence the claim.

Of growing importance due to the movement of manufacturing to the far east are jurisdictional issues. China for example does not recognise judgments of English courts, so that claims against a Chinese supplier may have to be pursued in China itself giving rise to additional practical and legal hurdles. For businesses who import direct from the Far East, this may in itself be a convincing reason for obtaining first party product recall insurance.

Anthony ManghamPartner, BLM Manchester

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Recent cases on defective products within The Consumer Protection Act 1987

Prior to the introduction of The Consumer Protection Act 1987 (CPA) it was necessary for those injured by a product to prove negligence on the part of the manufacturer if they were to bring a successful claim.

However, under the CPA, the requirement to establish negligence was removed and liability would attach ‘where any damage is caused wholly or partly by a defect in a product’.

This article examines two recent cases in which the issue of what constituted a ‘defect’; was central.

In Section 3 (1) of the Act states:

There is a defect in a product … if the safety of the product is not such that persons are generally entitled to expect.

This question of the safety standards that ‘persons are generally entitled to expect’ was considered in the 2006 case of Tesco Stores Ltd v Connor Frederick Pollard.

Tesco Stores Ltd concerned a child who was 13 months old at the time of the incident in which he ingested dishwasher powder from a plastic bottle which had been bought from Tesco.

The child became ill and a claim was made against Tesco and also the manufacturer of the plastic bottle on the basis that the bottle was defective.

In the county court the claimant was successful. The bottle had been secured with a ‘child resistant closure’ (CRC) cap. However, although the cap was more difficult to open than a normal bottle, it did not require sufficient torque to open as would have been needed to comply with the relevant British Standard. The county court held that having elected to fit a CRC cap to the bottle, although there was no legal requirement to do so with this dishwasher powder, the ‘consumer was entitled to expect and would expect the CRC to function at least up to the standard usually applied to CRCs’.

However, the Court of Appeal (CA) reversed the first instance decision. The court considered the question of what were ‘persons generally entitled to expect’ of the safety features of the cap and bottle and held that the public were entitled to expect that the bottle would be more difficult to open than if it had an ordinary screwtop. The public would be unlikely to be aware of the standard to which the product had been designed and the court was not willing to hold that there was an entitlement to expect compliance with these standards.

As the bottle was more difficult to open than an ordinary screwtop, even though it was not as difficult to open as it should have been under the British Standard torque measure, there was no breach of the Act.

In Alan Peter Ide v ATB Sales Ltd (2007), the claimant, Mr Ide, sustained serious head injuries after falling from his mountain bike. The claim against the importers of the bike was based on the argument that the handlebar of the bike suddenly snapped due to a defect and that this caused the claimant to lose control and fall off.

Conversely, the defendant denied that the handlebar was defective and argued that the claimant had somehow lost control of the bike and that the fracture of the handlebar was a result, and not the cause, of the fall.

Mr Ide had been riding with two companions on the day of the incident, but they were riding some distance behind him and did not witness the accident. Further, Mr Ide suffered from post traumatic amnesia and had no recollection of events.

Therefore, on this occasion it was to be the expert evidence and an analysis of the circumstances that would be decisive in determining whether the handlebar had been defective.

After reviewing the expert opinion and the totality of the evidence, the court found for the claimant. Mr Ide was an experienced cyclist and there was no evidence of a ‘hidden trap or lurking danger’ in the track where he fell off that would have explained the incident. Further, when Mr Ide was discovered lying on the ground by his companions, he was still virtually astride the bike, which was supportive of the theory

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that he had not lost control before the incident in which case it may have been expected that he would have been thrown over the handlebars and away from the bike.

Summary

The CPA was introduced to enhance consumer rights, partly as a response to the Thalidomide incident, in which birth defects were caused by the drug. However, the claimant is still required to prove that the product that is alleged to have caused the damage was defective.

In Ide, this involved an analysis of the evidence to prove that the incident was caused by a defect within the product. On this occasion, the claimant was able to satisfy the court that the handlebar was defective and had snapped causing the accident.

In contrast, in Tesco Stores Ltd, even though the screwtop bottle was not as hard to open as it should have been under the British Standard, the court did not consider that was enough to amount to a defect in the product, and the claim therefore failed.

The wording of Section 3(1) of the Act is so widely drawn that litigants face difficulty knowing whether certain characteristics of the product will or will not be held to be a ‘defect’.

Max EksteinSolicitor, BLM Manchester

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Product liability - a Chinese perspective

China is entering an era of rapid growth. The Chinese customs authorities report that exports of Chinese products in 2007 reached a total value of $12,180 billion, an increase of over 25% compared with 2006.Chinese-made goods are ubiquitous, particularly in the US and Europe - if a consumer picks up a toy, a t-shirt or even a laptop computer, there is a good chance it was made in China. With so many goods being exported, the number of defects discovered will inevitably increase. High-profile product recalls, such as those of Mattel toys, made 2007 a controversial year for Chinese-made goods, while the Chinese and Japanese authorities continue to exchange claims and accusations over an allegedly contaminated dumpling discovered in Japan. However, claims in China have been less widely reported and this update summarises the damages available in the Chinese courts in product liability cases.

Damages in civil cases in China are generally compensatory. The Product Quality Law, the General Principles of Civil Law and the Consumer Rights and Interest Law provide detailed provisions on the parties which may be held responsible for damages. Article 43 provides that an aggrieved consumer may seek compensation from the seller (if negligence can be established) and/or the product manufacturer (under a strict liability regime) and the general principles to be applied in assessing such damages. A consumer may usually claim under three heads of damages: general damages, mental distress or emotional injury, and punitive damages.

General damages

Article 32 of the Product Quality Law, Article 119 of the General Principles of Civil Law and Articles 41 and 42 of the Consumer Rights and Interest Law provide similar provisions on the damages that an injured consumer may recover. The Interpretation of Certain Issues for Applying the Law in the Trial of Personal Injury Cases, issued by the Supreme Court in December 2003, provides formulae for the calculation of damages in personal injury cases. The calculation of loss and expense are closely connected to the claimant's cost and standard of living and the place of the court determining the claim, which gives significantly different results for people in different occupations and different localities - for example, an individual with city resident status will be compensated according to a much higher scale than a rural resident.

In general, legislation provides as follows:

If a product defect causes physical injury, the responsible party is liable for:

medical expenses nursing fees during the period of treatment loss of earnings transportation costs costs for necessary nutriment rehabilitation costs (including the cost of aids and equipment and future costs and expenses).

If the defect causes permanent disability, the responsible party is additionally liable for:

living expenses disability compensation living expenses for the disabled person's dependents.

If the defect causes death, in addition to the compensation above, the responsible party is additionally liable for:

funeral expenses pension payments to the deceased's family transportation and accommodation costs reasonably incurred by the deceased's relatives in

preparing for and attending the funeral.

(The last two provisions are found in Article 17 of the 2003 interpretation.)

If the product defect causes property damage, the property must be restored to its original state or compensation must be paid at market value.

If the injured party suffers other serious losses, the party responsible must pay compensation.

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Mental distress or emotional injury

Mental distress and emotional injury are compensable grounds for a claim. Article 8 of the Interpretation on Certain Issues for Ascertaining Liability for Mental Injury in Cases of Infringement of Civil Rights, issued by the Supreme Court in 2001, provides that if the defect causes serious injuries or other grave consequences - which includes serious or fatal personal injuries that give rise to a product liability claim - the courts may award damages for pain and suffering in addition to other compensation available under civil law. Article 9 of the 2001 interpretation provides that, in assessing the damages, the courts must take into account various factors, such as:

the seriousness of the damage caused the nature of the conduct that resulted in the injuries the liable party’s ability to pay the standard and cost of living at the place where the claim is filed - this is the most significant

criterion.

The compensation for each claimant is generally a small amount, between Rmb5,000 and Rmb100,000. In the Gas Stove Explosion Case a gas stove exploded in a Beijing restaurant where Jia, a 19-year-old high school student, was dining with her family. Jia suffered burns to her face and hands. The injury rendered Jia 30% handicapped, with permanent scars that seriously affected her appearance. Jia sued the manufacturer of the gas container, the manufacturer of the stove and the restaurant jointly for compensation totalling nearly Rmb1.66 million (approximately $207,500), including Rmb650,000 in compensation for emotional distress. The Haidian People’s Court opined that the emotional distress Jia had suffered as a result of the accident was substantial, undeniable, obvious and compensable. However, in considering damages for emotional distress, the court reasoned that compensation amounts must correspond to living standards and awarded Jia only Rmb100,000.

In Sue v Ma Bucai and Liu Zeyun, a 2004 case about the quality of powdered milk in Anhui province, the Fuyang Intermediate People’s Court stated that the quality of the product sold by the defendants was far below the national standard and resulted in the claimant suffering from malnutrition. However, it awarded only Rmb40,000 in damages for emotional distress.

Punitive damages

In general, punitive damages are not awarded in product liability cases in China. However, in the event of fraud against a consumer, Article 49 of the Consumer Rights and Interest Law requires that the manufacturer and/or seller pay the consumer an amount equivalent to the price of the product as punishment. Pursuant to Article 2 of the 2003 interpretation, the recoverable damages may not be reduced unless the injured party is found to have committed a serious fault which significantly contributed to the injury or loss that he or she suffered.

Comment

Chinese legislation provides for various heads of damages for claims by aggrieved consumers in product liability cases. The heads and amounts of damages awarded are conservative compared to those in the US or even in most European jurisdictions. Furthermore, the laws provide guidance on the size of award only on the basis of the residential status of a claimant in China; it is unclear how the courts would deal with a claim by a foreign claimant living abroad. It remains to be seen whether the court would apply the highest level of damages available to a Chinese resident or would consider that a foreign claimant should be judged on the living standards of his or her country.

Terrence LeePartner, Smith & Partners, Asia

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Consumer redress and ‘class actions’

In early May 2008, the government launched a review of the consumer protection regime in the UK. Part of this review seeks to investigate the options for improving consumer empowerment and redress. A facet of that debate concerns the method by which multiple consumers may pursue claims collectively against businesses who have caused their losses.

Policy makers in the UK and in Europe are increasingly of the view that such claims could be efficiently pursued collectively, ie pursued together in a structured and managed way. The debate that is emerging is largely around empowering large numbers of consumers who have suffered harm a) with access to justice and b) an efficient process for resolving their claims. Such an approach could bring benefits for business who face the claims - if there are appropriate checks, balances and protections.

However, there is a risk in so doing that the litigation culture leans towards a class action regime, importing the perceived excesses of this model from North America. European Consumer Commissioner Kuneva is aware of this concern among the business community, and addressed it directly in a speech in Lisbon:

To those who have come all the way to Lisbon to hear the words ‘class action’, let me be clear from the start: there will not be any. Not in Europe, not under my watch.

The Commission favours instead the term collective consumer redress. It has since published a series of benchmarks against which to measure any future proposals. The main elements are set out below.

The mechanism should enable consumers to obtain satisfactory redress in cases which they could not otherwise adequately pursue on an individual basis.

It should be possible to finance the actions in a way that allows either the consumers themselves to proceed with a collective action, or to be effectively represented by a third party.

Plaintiffs'(sic) costs for bringing an action should not be disproportionate to the amount in dispute. The costs of proceedings for defendants should not be disproportionate to the amount in dispute.

These principles themselves should not be controversial – indeed they are almost identical to those formulated by Lord Woolf some 12 years ago and which led to the current group litigation order (GLO) provisions in England and Wales. Although some 64 GLOs have been certified since 2000, an influential body of opinion is emerging challenging the effectiveness of the mechanism and pointing out its limitations.

For example, in a report issued in November 2007, the Office of Fair Trading called for new procedures to facilitate collective action by consumers following anti-competitive conduct by traders. And in February 2008, the Civil Justice Council (CJC) published research examining the ‘unmet need’ for collective redress which is not presently served by the GLO mechanism.

Recent cases further underline the toe-hold that collective redress has gained in the UK litigation landscape. First, the favourable resolution of the representative claim brought by Which on behalf of consumers against JJB Sports, for losses suffered due to price-rigging of football shirts. Second, the obvious process inefficiency in the thousands of individual bank charges test cases. Third, the collective settlement secured by a US specialist class action firm for air passengers who suffered losses arising from collusion by BA and Virgin in setting fuel surcharge levels.

Any UK collective redress mechanism could apply not only to claims already suited to the GLO approach - such as product liability and mass transport accident claims – but also to new areas such as environmental claims. Key sectors likely to be affected include food, agriculture, transport, retail and the pharmaceutical industry. Manufacturers, importers, retailers and logistics companies should track this emerging issue. We expect further developments on the topic and further consultation in the second half of 2008.

Alistair KinleyHead of policy development, BLM national

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DRI – the voice of the defence bar

Who are DRI you may ask? The Defence Research Institute (DRI), was founded in 1960 and has since provided an open forum for in-house counsel and lawyers to exchange ideas and information in the defence of industry and business. Its base is in the USA and it has a significant membership of over 22,000, and growing. The author’s interest in DRI follows over 10 years experience as external counsel representing and defending product liability cases for a major German motor manufacturer. As with most major manufacturers and retailers, exposure to such claims in the USA has always raised major concerns, not least with the spectre of punitive damages awards. The obvious advantages - the exchange of ideas and information, high quality training and an influential legislative voice, are compelling.

In February 2008, the author attended the latest Product Liability DRI Conference. This year, (happily for the author), the conference was held in Phoenix, Arizona. Events such as these, together with involvement in committee and publication of articles, proves immediately beneficial to clients and BLM. Further, the opportunity to network with in-house counsel and lawyers in various jurisdictions proves highly stimulating.

There has become an increasing awareness of the benefits of DRI to the worldwide legal community. In the writer’s experience, the enthusiasm and commitment of DRI members to serve their clients more effectively is significant. Following the success of DRI in the US, it was no surprise that DRI Europe was established in 2007 and it is expected that the added benefits to BLM and its clients who trade and manufacture within Europe will become apparent.

A key aspect in the development of DRI is the 25 committee led specialist groups. The committee provides and creates the agenda, and gives direction to each of these groups. Although clearly well developed in the US, it is hoped over time to replicate similar groups within Europe.

It is worth noting that in the regulatory area, DRI tracks and monitors developments throughout most jurisdictions including the EEC and this is particularly helpful and time saving to legal advisers and clients.

As you will see from Alistair Kinley’s article on class actions, EU Competition Commissioner Kroes’ views ‘effective consumer redress as fundamental to the proper functioning of the EU single market’. It will doubtless be appreciated that education, advice and co-operation amongst defence counsel, both in-house and external, becomes fundamental to the effectiveness of its role.

It is the intention to keep you fully informed of news and developments within DRI through Brand news.

Involvement by in-house counsel is encouraged as no doubt you have much to contribute.

Chris CoughlinPartner, BLM LeedsDRI committee member of the international group (US)

BLM international product network

Every manufacturer and supplier knows that its brands cannot be limited by domestic boundaries. Wherever they trade they must be able to do so in the certain knowledge that they can protect that brand and its reputation in an increasingly competitive environment.

BLM works with a tried and tested network of lawyers who are used to protecting corporate clients throughout the world. The network has a particular expertise in defending manufacturers and suppliers in product liability law suits and brand name and trademark cases.

Fur further details contact:

Chris Coughlin: chris.coughlin@blm-law.comJim Sherwood: jim.sherwood @blm-law.comMark Benson: mark.benson@blm-law.com

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Birmingham63 Temple RowBirminghamB2 5LS

Tel: 0121 643 8777Fax: 0121 643 4909

Cardiff23 Neptune CourtVanguard WayCardiffCF24 5PJ

Tel: 02920 447 667Fax: 02920 489 041

LeedsPark Row House19-20 Park RowLeedsLS1 5JF

Tel: 0113 236 2002Fax: 0113 244 2002

LiverpoolCastle Chambers43 Castle StreetLiverpoolL2 9SU

Tel: 0151 236 2002Fax: 0151 236 2585

London Salisbury HouseLondon WallLondon EC2M 5QN

Tel: 020 7638 2811Fax: 020 7920 0361

ManchesterKing’s House42 King Street WestManchesterM3 2NU

Tel: 0161 236 2002Fax: 0161 832 7956

SouthamptonCarlton HouseCarlton PlaceSouthamptonSO15 2DZ

Tel: 023 8023 6464Fax: 023 8023 6117

Stockton-on-TeesInnovation HouseYarm RoadStockton-on-TeesTS18 3TN

Tel: 01642 661630Fax: 01642 661631

DisclaimerThis document does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. It is intended only to highlight issues that may be of interest to clients of Berrymans Lace Mawer. Specialist legal advice should always be sought in any particular case.

Brand news is published by the marketing department of Berrymans Lace Mawer on behalf of the partnership.© Berrymans Lace Mawer 2008.

Berrymans Lace Mawer is regulated by the Solicitors Regulation Authority and accredited to qualify standards ISO 9001 and Lexcel.

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