A creative exit strategy is sometimes the best defense for a manufacturer against potentially costly exposure to mass tort damages. While not every type of mass tort lends itself to a quick exit strategy, on occasion the litigation can be brought to a prompt and satisfactory resolution. However, it takes creative lawyering to appreciate and seize on these opportunities when they happen to arise.
For manufacturers involved in mass product liability actions, managing the sheer number of parties and their individual legal and factual issues can be daunting. Plaintiffs often pursue such claims individually, or on behalf of a class of similarly situated parties, in both federal and state courts, primarily against product manufacturers, designers and distributors. Various insurance companies and retailers also commonly face related liability or financial exposure.
The potential costs to a manufacturer can be huge, including defense expenses, indemnity payments and even punitive damage awards. In some instances, the best defense is a strong, front-loaded effort to defeat the opposition with the best trial attorneys and experts prepared to show the plaintiffs that the litigation is not as lucrative as they may initially have believed. An aggressive approach can work well if a defendant manufacturer has a small number of cases in a new mass tort area.
Sometimes the best course of action in mass product liability cases is to reach a global resolution satisfying the needs of all plaintiffs and defendants. This result can be effected only with the cooperation of both sides, and through some creative strategies allowing everyone to gain something -- the proverbial win-win outcome.
But, what if a related product designer or marketer declares bankruptcy or develops an alternative strategy for resolving the litigation, such as a class-action settlement, leaving the manufacturer alone to bear the brunt of the litigation risks and expenses? In these cases, a creative exit strategy from the litigation may be key not only to the manufacturer's financial well being, but also to its ultimate survival.
With the right strategy, the manufacturer may be able to take advantage of the bankruptcy of the product's designer and/or distributor without being forced to seek bankruptcy protection itself.
Frequently, in situations where a company designs, markets and distributes a product but outsources the actual manufacturing, the companies involved share liability as co-defendants. If the product designer and/or marketer cannot handle the cost of litigation and seeks bankruptcy protection, then the manufacturer is left “holding the bag” under the theory of joint and several liability, as the sole entity remaining that put the product into the stream of commerce. This may occur even though the manufacturer had no control over such aspects as product labeling, including warnings placed on the product prior to its distribution, a concern for manufacturers of dietary supplements and other health-related products, among others.
Often such cases are consolidated into a multidistrict litigation (MDL), in which all federal actions are combined in order to limit lawsuits and duplicative discovery. An MDL provides a platform for global settlement negotiations, with commonality requirements for a class-action settlement satisfied, and agreement on a scoring system and matrix that takes into account each individual plaintiff's circumstances and available defenses.
The MDL matrix must weigh liability and damage issues based on such factors as the nature, timing and severity of claimed injuries; use of other potentially harmful products; medical diagnosis; the ability to perform daily activities after an injury; and the merits of a claim. Applicable defenses would include statutes of limitations; the timing of the product use and injury; and the association, or lack of it, between the plaintiff's injury and the product.
If a distribution company is involved and attempts a class-action settlement, the manufacturer can potentially end its liability by entering into an agreement with the distribution company to provide a portion of the funds to satisfy the settlement in exchange for obtaining a release from all plaintiffs' claims. The MDL court must approve the scoring matrix and the negotiated class settlement between the new distribution company and class representatives. If the number of opt-outs is limited, it would be to the manufacturer's and new distributor's advantage to quickly resolve those claims.
This agreement, however, still leaves the manufacturer exposed to unresolved claims against the original bankrupt distributor when the product designer or the distributor files for Chapter 11 relief.
In some federal circuits, however, the manufacturer may have a remedy for avoiding potential new liability: a special channeling injunction.
A special channeling injunction may be used in some circumstances to protect a nondebtor manufacturer. The bankruptcy court retains jurisdiction over the manufacturer because of its cross-claims against the bankrupt designer and/or distributor.
The manufacturer and designer and/or distributor may be able to obtain special injunctive relief via the bankruptcy laws because the manufacturer's claims are a necessary and critical part of the debtor's estate, particularly when the debtor does not have sufficient capital to fund the bankruptcy trust itself. The manufacturer would enjoy the benefits of the bankruptcy's automatic stay pertaining to the litigation.
Through a channeling injunction, all defendants would receive relief from potential future claimants and current pending state litigation claims. The bankruptcy court may enter a channeling injunction on all claims against the designer and non-bankrupt-related defendants by confirming a Chapter 11 reorganization plan requiring all entities to fund a new trust with new money in addition to that used to satisfy the class settlement trust. To be truly effective, the channeling injunction must bind all parties, including those that have opted out of the class action, state court plaintiffs, and those that did not vote to accept the reorganization plan to seek relief from the class settlement and Chapter 11 trust.
Seeking out a special channeling injunction may not be an effective strategy in all situations in which a related company seeks bankruptcy protection. It would be virtually impossible to certify a class when the number of future plaintiffs is unknown. Also, unlike asbestos litigation, where the latency of the disease means that future injuries cannot be discovered until years later, potential injuries from a diet supplement or other health-related product may occur much sooner. If the product is no longer on the market, however, further potential liability would be limited, and class certification would be more possible, using a scoring matrix that takes into account the individuality of each plaintiff's claim.
Similarly, the special channeling injunction must take into account the individuality of each plaintiff's claim, and the trust must be sufficient to resolve all claims. In order for a nondebtor manufacturer to benefit from a bankruptcy stay, the manufacturer's contribution to the trust must be important and necessary. Thus, it cannot be a trivial contribution.
A special channeling injunction may not be an effective strategy in all courts. For instance, while the Southern District of New York appears amenable to special channeling injunctions, other courts, such as those in the 3rd U.S. Circuit Court of Appeals, are more conservative in their use of channeling injunctions.
The willingness of plaintiffs' counsel to resolve the great majority of claims is essential to a successful resolution via a special channeling injunction. In determining the class settlement's reasonableness and fairness, the bankruptcy court will weigh heavily a high level of support and participation of plaintiffs in reaching a global settlement. The plaintiffs must receive a fair and reasonable settlement that generates as few opt-outs as possible. Also, defendants must receive the benefits of a settlement class action and/or the protections afforded by the Bankruptcy Code, even though only one defendant sought Chapter 11 relief.
Such a result through a special channeling injunction gives all parties certainty and caps the long-term risk for a manufacturer when faced with the uncertainties of mass tort litigation without the primary co-defendants to share the burden of defending so many cases.
Sharon Caffrey is a senior litigator and a member of the Trial and Products Liability practice groups at Duane Morris.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.