Prevention Is Best Defense

Dec. 21, 2004
Will your legal department keep you out of trouble?

"We are in a world of preventative counseling. It's the lawyer's job to keep the horse in the barn and safe," says attorney Judson W. Starr, a partner at Venable, Baetjer, Howard & Civiletti LLP, Washington. Starr, formerly director of the Dept. of Justice environmental-crimes section, now advises companies on environmental compliance. But attorneys who counsel in all of the most liability-prone areas, from environmental law to product liability and employment discrimination, keep coming back to the same principle: The legal department should be involved in operations before there is a whiff of legal trouble. It's the best chance of avoiding legal trouble later on. Recent large judgments against corporations have focused the attention of many CEOs on the liability issue. Few failed to notice, for example, when in July General Motors Corp. was hit with a record punitive-damage award in a product-liability case involving a gas tank that exploded in an accident, severely injuring six passengers. Punitive-damage awards are rarer than one might think from reading headlines, however, and it's becoming more common for judges to reduce them when they are imposed. (In the GM case, the $4.8 billion punitive-damage award was reduced to $1.09 billion. GM is appealing.) But companies shouldn't take much comfort from these reductions or from the fact that large verdicts are often set aside on appeal, advises Victor Schwartz, a partner at Crowell & Moring LLP, Washington, and the general counsel of the American Tort Reform Assn. "Many states have bonding requirements," he says. "So if you get a huge verdict against you, you may have to put up as much as 150% of that in something recognized as cash by the marketplace before you can appeal." Schwartz believes this is a major reason companies agree to huge settlements, as the tobacco companies did in Minnesota state court, even if they think they might prevail on an appeal. Bonding requirements, legal costs, the cost of executive time in litigation, and bad publicity add up to a situation worth paying a good deal to avoid, even with the best legal outcome. For manufacturers, product liability is clearly one of the danger areas. What can the legal department do in advance to minimize the dangers? Cases involving failure to warn or inadequate warnings are where companies are most vulnerable, Schwartz says. And under this rubric, as the result of recent legal developments, manufacturers now have a new legal duty: the post-sale duty to warn. Duty, in the parlance of tort law, means that if you don't do it, you may get sued. The post-sale duty to warn could apply, for example, to a pharmaceutical company that learns of a drug's side effects after the drug has been approved by the Food & Drug Administration and marketed. Currently, this issue is proving to be significant in the Fen-phen litigation targeting American Home Products Corp. "Post-sale duty to warn is one of the most significant new areas where an ounce of prevention is worth a pound of cure afterward," Schwartz says. "Companies will need a protocol that will allow them to stay fully informed about any newly discovered risks from their product and then to react effectively when those risks are known." Instead, he adds, what often happens is that a company learns about a risk and then either sits on the information or panics because it doesn't know what to do with it. Should the company put ads in the newspaper? Is there a computer database that will facilitate contacting consumers personally? Will just starting to put warnings on the new batch of products be good enough? These are questions that the lawyers should consider long before the crisis. "The greatest danger in product liability is when there is a hazard the manufacturer knows about and the product user does not," Schwartz points out. But recent developments in case law suggest that warnings themselves, no matter how timely, may not be a defense in product-liability action if a reasonable design change could have mitigated the hazard. The lesson for companies is that both product-design engineers and the people designing the warnings should be working with the legal department. For the design of warnings, Schwartz advocates retaining outside help -- not necessarily lawyers, but specialists in the field known as "human factors." "If your warnings have been reviewed by competent outside people," he says, "you are in better shape if someone does challenge them as inadequate." Early in his career, Schwartz was a plaintiff attorney himself, and he still maintains contacts with the plaintiff bar. That history may account for one of his more unorthodox ideas, which he says occurred to him at the shark tank of the Baltimore Aquarium during feeding time. He noticed that when one shark turned up his nose at a piece of meat, the rest of them ignored it as well. "If you have a new product," he suggests, "and you are wondering whether your warnings are good enough or not, you might in some situations retain a very good plaintiffs' lawyer and have him or her look at what you've got." It's unlikely that other personal-injury lawyers will file a lawsuit when a colleague has signed off on it, Schwartz points out. "If they do, he becomes your first witness." Employment Discrimination Another area of significant potential liability is employment discrimination. In 1998 there were nearly 24,000 employment civil-rights lawsuits filed just in federal courts, a number that has remained fairly constant in recent years but is up from 1994, when there were just 16,000 such lawsuits. "Judges, particularly on the federal-district-court level, have repeatedly supported alternative dispute resolution in this area, because the growth of employment-related litigation is overpowering the court system," says Ronald M. Green, a partner at Epstein, Becker & Green PC, a New York -based law firm with an active employment practice. In 1998 two Supreme Court decisions significantly changed the litigation landscape with regard to discrimination lawsuits. Burlington Industries Inc. v Ellerth established that a plaintiff in a sexual-harassment claim doesn't have to show she (or he) suffered an adverse employment action for resisting sexual advances. Faragher v City of Boca Raton established that when an employee harasses, the company can be held liable if it has failed to make its antiharassment polices well-known to employees and if employees do not have a viable mechanism to register complaints. These decisions were initially read as bad new for companies. But another Epstein, Becker partner, Frances Maloney, says that although the decisions seem to suggest new ways that companies could be liable, they also provide a road map for avoiding those liabilities. "The courts said you could avoid liability by asserting as an affirmative defense that the company took reasonable care to prevent and correct sexual harassment," she says. "It's important that the mechanism for complaint be hospitable. Some companies are using independent ombudsman to receive complaints. In general there has to be more than one person you can complain to." At PaineWebber Inc., a "Respect in the Workplace" harassment-prevention training program has been in effect since before the 1998 Supreme Court decisions that essentially created the bandwagon. "Our program includes a 90-minute slide and verbal presentation, with a series of 12 case studies that are actually taken from scenarios that HR and employment-law people have encountered and had to resolve," says Pamela S. Poff, PaineWebber deputy general counsel and senior vice president. "We in this firm are very much in a preventive mode." The PaineWebber program emphasizes sexual harassment, but it touches on all forms of harassment. In January of this year, the firm added an alternative dispute-resolution program. It lays down a sequence of increasingly formalized options that begins with a complainant calling an 800 number and an attempt to resolve the problem close to its source. If necessary, the process moves through a series of steps to mediation and, finally, mandatory arbitration. Some companies have avoided intensive training on discrimination issues out of fear that by raising the issue, they will precipitate complaints and possible lawsuits that otherwise would not have arisen. Poff believes this is a mistake. "It may be true there are a small number of complaints that otherwise would not have come forward. But as a matter of good business practices, I think every employer has an obligation to know where the problems are," Poff says. She adds that studies show that most people go outside because they are frustrated by the lack of an internal avenue. The PaineWebber program acknowl-edges that drawing clear lines in sexual harassment is not always easy, and Poff maintains that a company's approach to sexual harassment must be leavened with common sense. For example, there is nothing in the law that prohibits employees from dating. "But you can't hit on someone innumerable times, so that you make them feel entirely uncomfortable if they see you walking down the hall," she says. "And, as I tell people whom I train: If you date someone who reports to you, you don't need a lawyer. You need a psychiatrist." With its domestic program in place, PaineWebber is now working on adapting and extending its harassment-training program to its overseas offices. This is the next front in prevention, say attorneys Green and Maloney. Companies must now recognize that U.S. harassment laws are being adapted in many overseas jurisdictions. "A Japanese equal-employment-opportunity law that went into effect in April of this year, for example, closely mirrors guidelines set down by the EEOC, including the definition of a quid pro quo in a sexual-harassment case. They've taken U.S. formulations and grafted them right into their law," says Maloney. "This means that Japanese managers of American subsidiaries are going to have to be trained in this area, as well." Green offers a final suggestion with regard to employment issues. In his view, virtually all companies should have Employment Practices Liability Insurance. EPLI, which insures most employment-related liabilities, is a relatively new insurance product that is now widely available at competitive rates. Innocent Misrepresentation Schwartz says the greatest emerging liability threat for companies has received very little attention. It's what lawyers call express warranty, or innocent misrepresentation. "I am surprised that plaintiffs' lawyers have not taken advantage of it. But they will," he says. The danger will arise, Schwartz explains, when the company either in its advertising or through statements made by the sales force, makes representations about the safety of a product and those statements turn out to be untrue. The recent Restatement (Third) of Torts: Products Liability, a document that sets crucial parameters and definitions for tort cases, made it clear that even innocent misrepresentation can create liability. "It will make no difference," says Schwartz, "if every scientific test you have taken shows your belief to be credible. 'These tires will not blow out. This drug is not habit-forming. This condom will prevent AIDS.' If it turns out to be untrue, you are stuck. You can say your product is stronger. You can say it is better. You can say, 'We make every effort to make it safe.' But if you say, 'This glass won't shatter,' you've had it." This will be an appealing field for plaintiff lawyers, Schwartz predicts. The case is relatively easy to prove, and in the rush to get business many companies are pushing the envelope. "If I were a CEO," he says, "I would tell my general counsel, my marketing people, and ad people to look at everything we say about our products and make sure we don't have out there some promise regarding the health or safety of our products which, if found to be untrue, could create a liability situation." It could be a significant management challenge, he acknowledges. "The goal is to create a kind of team spirit about liability. The sales force needs to understand what it can and can't say, and why hyperbole in this day and age can cost the whole business."

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