• Facebook and Diversity Hiring: Extra Points for Diversity Hires

    Two years ago, Facebook began offering its in-house recruiters 1.5 points for a diversity hiring in engineering. In-house recruiters got 1.5 points for hiring a black, Hispanic, or female engineer. The Wall Street Journal reported that the needle on diversity did not move, despite the fact that points mean a stronger performance review for the recruiting employees, something that can mean a higher bonus. The Wall Street Journal now reports that Facebook now upped the bonus points to 2 for minority hires.

    The program is an interesting one because Title VII prohibits classifying applicants for jobs on the basis of race, color, religion, sex, or national origin. The bonus point program classifies applicant by race, color, and sex. Facebook has explained the program as one designed to increase diversity in its work force. As noble as the cause may be, there really is not a diversity desire exception to Title VII prohibitions on discrimination.

    In Taxman v. Board of Educ. of Tp. of Piscataway, 91 F.3d 1547 (3rd Cir. 1996), the EEOC brought suit against the school board of Piscataway because of its affirmative action plan that favored minority teachers over nonminority teachers in making layoff decisions. The federal district court entered a summary judgment for the U.S. government, and the school board and teachers appealed. The court held that the school’s nonremedial affirmative action plans were prohibited by Title VII. The court also held that the plan also violated Title VII because it was adopted for purpose of promoting racial diversity, rather than to remedy discrimination or effects of past discrimination. The court also found that the plan was governed by board's whim, was of unlimited duration, and imposed job loss on tenured nonminority employees. The U.S. Supreme Court did not grant certiorari in the case, and has never ruled on the issue of affirmative action plans undertaken for purposes of diversity in the workplace. The court has allowed diversity programs in education programs, but only for limited periods of time. Grutter v. Bollinger, 539 U.S. 306 (2003). Further, the law school admissions program used race as one factor in a multi-factor. The Facebook bonus program is based solely on race, color, and sex.

    Diversity programs are permitted, indeed, mandated in some cases, when a company or agency has discriminated in the past and needs to remedy past wrongs in hiring, firing, and promoting. This type of remedial program is permitted. However, Facebook’s program is simply a diversity effort and not a remedy for past discrimination.

    Facebook could be subject to a challenge from applicants who were not hired. With the program now public, that litigation could be forthcoming.

    DISCUSSION STARTERS

    Explain Facebook’s diversity program.

    Discuss the current law on diversity hiring programs.

  • White-Collar Crimes: Flint, Michigan and VW

    During the past week, one public official and engineer have entered pleas to charges related to their work. In Flint, Michigan, Corinne Miller, the epidemiologist for the state of Michigan has entered a no-contest plea to charges that she was aware of 91 cases of Legionnaires’ disease in the Flint, Michigan area during 2014-2015 (including 12 deaths) and failed to report it to the general public. Her no-contest plea was to misdemeanor charges of willful neglect of duty. In exchange for the plea, prosecutors dropped the felony charges against her fo felony misconduct and conspiracy charges.

    Flint, Michigan has been the subject of national attention since it was finally revealed that the aging pipes and fixtures in that city’s water system were releasing toxic waste into the drinking water. Flint officials had made the decision to change from Detroit’s water system to using Flint River water in 2014 in order to save money. Although causation has not been definitively determined on the Legionnaires’ illnesses and death, most believe that the lead in the Flint water was the cause. Eight other officials have been charged with various crimes that all realte to their knowledge about the condition of the water, the resulting illnesses, and their failure to release required public notifications or take action to remedy the water problem. “Ex-Official Enters Plea Deal on Flint Water,” New York Times, September 15, 2016, p. A14.

    In a second case, a former Volkswagen engineer entered a guilty plea to charges of conspiring to defraud regulators and car owners with the installation of software in VW autos that resulted in falsified emissions tests for the vehicles. Robert Liang, the longstanding VW employee, is believed to be part of a new U.S. Justice Department policy of prosecuting individual employees for their actions on behalf of their employers. The department has been roundly criticized for not prosecuting individuals in the banking crisis of 2008 and, as a result, has adopted new processes and procedures for working through cases by prosecuting employees. In the 2008 banking cases, the Justice Department secured fines from the banks but very few convictions or even attempted prosecutions. Mr. Liang’s plea agreement spells out the timeline for the falsified emissions software, his role, and the level of knowledge throughout the company. His plea and testimony will facilitate additional prosecutions. Mr. Liang faces up to five years in prison. Hiroko Tabuchi and Jack Ewing, “VW Engineer Pleads Guilty in a Criminal Case Brought by the U.S. Over Diesel Emissions Fraud,” New York Times, September 10, 2016, p. B1.

    The key component in both cases as well as the common thread through the very different crimes charged is knowledge. In both cases, the employees were charged with having knowledge of statutory violations and taking no action to report or stop the actions. In white-collar crime, those elements are key: knowledge proves intent and intent is required for criminal prosecution.

    DISCUSSION STARTERS

    Explain the charges in the two cases.

    Why is the Justice Department pursuing individual employee prosecutions?

  • Tree Declared A Nuisance in Lawsuit Between John Lennon’s Son and Marisa Tomei’s Parents; Landmark Property

                                          

     

    The parents of Oscar winner Marisa Tomei are suing their neighbor Sean Lennon, son of the Beatle John Lennon, over a 60-foot high tree in his yard. The Tomeis claimed the 50 year old tree is a nuisance because its roots have displaced their front stoop, twisted the wrought iron railing on the stoop, and the roots are breaking through the floor in the basement. Part of the complaint reads, “The tree has compromised the basement wall and interior . . . [causing] irreparable damage to the structural integrity of the building.” Additionally, all 14 doors in the Tormeis’ two-family home cannot be closed because of the damage to the foundation. Last year the tree caused a pipe to burst, forcing the couple to move in temporarily with their daughter. Additionally, the city Buildings Department issued the Tormeis a violation for the broken stoop, the fine for which accelerates if the problem is not fixed promptly. Plus, the couple is concerned that damage to the building’s façade will happen soon.

    The properties are located in NYC’s Greenwich Village on West 13th Street.

    Lennon, through his lawyer, had offered to repair the stoop and handrail, but he wanted to move the railing to make room for the tree’s 24 inch trunk. Said the couple’s lawyer, “To suggest that the Tomeis forever transform their 170-year old property so that Lennon may enjoy viewing the tree is absurd.” Also, alterations would be complicated by the fact that the property has been designated a landmark.

    Landmark status means that a property has been determined by a government agency to have historical value. Owners of such property are restricted in the modifications they can make. They are required by law to obtain a permit before working on the exterior of their property, including any restoration, alterations or additions. To obtain a permit requires submission to the Landmark Preservation Commission, the NYC agency that oversees landmarks, an application. Included must be drawings, photos, samples of materials proposed to be used, and other details that describe the project and its effect on the landmark property. The application is reviewed by a staff preservationist or the full Landmark Preservation Commission. Only if the permit is granted can the work be done.

    The tree is an ailanthus, an invasive species that was introduced into the United States from China. It grows new roots constantly and has been known to crack the walls of basements.

    The judge has now ruled the tree is a nuisance and Lennon must “as immediately as practicable” remove it and the roots that have entered plaintiff’s land. A nuisance means use of real property in a way that substantially interferes with neighbors’ enjoyment of their property. The law values the right of people to the peaceful, uninterrupted enjoyment of their property. A nuisance lawsuit seeks to stop objectionable conduct.

    As a remedy, plaintiffs typically seek an injunction, which is a court order requiring defendant to cease the offensive condition, plus money to cover any damages plaintiff incurred.

    The Tomeis are continuing their lawsuit for $10 million against Lennon for damages allegedly caused by the tree. The issue of monetary loss will be addressed at an in-court hearing on October 25th.

    Before starting the lawsuit, the Tomeis had hoped to resolve the matter amicably but they tried for a year to contact Lennon and he failed to respond.

    A NYC newspaper ran the story under a headline reminiscent of a Beatles song, “It’s time for Maxwell’s Silver Hammer to come down on Sean Lennon’s tree.”

     Marisa Tomei’s Oscar was for Best Supporting Actress in My Cousin Vinney, an incredibly great performance.

    For more information, click here.

    DISCUSSION QUESTION:

    How might Lennon have been a good neighbor and saved the tree?

     

  • Tesla and the Constitution: Could We Just Sell Our Cars?

    The all-electric car company, Tesla, is sending a shock through the auto industry as it challenges the franchise car-dealer sales model. Tesla has adopted a direct-to-consumer sales model, something that differs from all other auto manufacturer sales.  The auto industry has always followed a franchise dealer sales model, one that allows sales through franchised dealers, precluding manufacturers from selling cards directly to purchasers.

     Tesla has adopted a different sales model because it does not use the bargaining, high-pressure model of other manufacturers.  Its cars are uniformly priced with price differentials resulting only from features chosen by customers.  Tesla also maintains that the its direct-to-consumer sales model is necessary in order for it to educate buyers about its cars. 

     Most states'  franchised dealers have been active in trying to prohibit direct-to-consumer sales of cars by manufacturer, including Michigan.  However, in 2014, in response to Tesla’s increasing market present, the Michigan legislature actually enacted a ban that prohibits a franchising manufacturer from

    competing against “its” independent, franchised dealers.  Despite Tesla not using this model (Tesla has no franchised dealers), the effect of the legislation is to require all new car sales to go exclusively through franchised dealers.  Michigan has a clear interest in protecting its auto industry and the impact of the legislation is to preclude Tesla competition in Michigan. 

     As a result, Tesla has filed suit in federal court based on the Commerce Clause of the U.S. Constitution.  Under the constitution and case interpretation, states can pass laws that affect interstate commerce as long as there is a general health and welfare purpose for the laws and the laws do not impose an undue burden on interstate commerce.  In this case, the result is that domestic businesses (businesses operating within the state) are favored over out-of-state businesses. The bill was even referred to as “the anti-Tesla bill.” Under the bill, Tesla would also be prohibited from setting up service facilities for Michigan residents who purchase a Tesla out-of-state.

    Tesla has had a remarkable start as an auto manufacturer.  It began bringing vehicles to market just five years after its founding. Its first offering was the Tesla Roadster, released in 2008, which was the first commercially-produced,

    highway-capable, all-electric vehicle made in the United States. The Roadster was a high performance sports car with a battery range of 245 miles, the longest range of any production vehicle up until that time.

    In 2012, Tesla introduced the Model S, a full sized, all-electric luxury sedan with a range of 265 miles per charge. The 2013 Model S was named Motor Trend Car of the Year and was recognized by Consumer Reports for “the highest owner-satisfaction score Consumer Reports has seen in years: 99 out of 100.”A 2014 Consumer Reports survey found that “98 percent of Model S owners [said] they would definitely purchase it again.” In 2015, Car and Driver named Model S the “Car of the Century,” an award given in the prior century to the Ford Model

    In addition, Model S consistently receives a five-star safety rating (the highest possible) in each testing category from the National Highway Traffic Safety Administration. The fear of competition is great, but state legislation cannot be used as a means of minimizing competition. This Commerce Clause challenge is similar to others that businesses have brought and, generally, been quite successful at the U.S. Supreme Court level.  For example, statutes that limited the length of commercial vehicles and required commercial truck lines to buy different trucks for certain routes or in some cases to stop at a state’s border to remove one of the double trailers being pulled were determined to be an excessive burden on commerce. Raymond Motor Transportation v .Rice, 434 U.S. 429 (1978)  In Bibb v Navajo Freight Lines, Inc. , 359 U.S. 520 (1959), the Supreme Court analyzed an Illinois statute requiring all trucks using Illinois roads to be equipped with contour mudguards.  The court held that the requirement was too much of a burden.  Special licenses, extra procedures, and other requirements that are not necessary for public health and welfare are also invalid under the Commerce Clause.  Tesla has precedent on its side.

     DISCUSSION STARTERS

    Explain the Michigan law.

    Discuss what Tesla has a good chance of winning the suit. 

  • Jimmy Choo Shoe Company Is Sued for Interference with A Business Relationship

            

    Jimmy Choo makes footwear and pocketbooks coveted by many and worn by the rich and famous, including Jennifer Lopez, the Duchess of Cambridge, and TV and film actress Diane Kruger. The shoes are often seen on the red carpet and sell for up to $4,600. What does that buy? To name just one unique feature, crystal-encrusted stilettos.

    The company was founded by Mr. Choo and Tamara Mellon. Choo sold his shares in 2001. The Jimmy Choo company was acquired by Labelux in 2011. A dispute over pay led to Mellon’s departure in 2012. After waiting out a year in compliance with a noncompete clause she signed (a contract term requiring that she not engage in business activities that compete with her prior employer), she opened a competing business selling upscale shoes, handbags, and accessories.

    To produce shoes for her new company, Mellon sought to engage master artisans from Italy, some of whom do work for Choo. Those Italian companies work not just for Choo but for some of Choo’s competitors as well, such as Christian, Louboutin and Chanel.  Per allegations in the lawsuit, Choo threatened the manufacturers with the loss of business if they worked with Mellon or anyone affiliated with her. As a result, she claims the foreign manufacturers refused to do business with her. The company she started filed for chapter 11 bankruptcy in 2015 (a proceeding primarily for corporations that allows the debtor to propose a plan for profitability, often including costs cutting plans and seeking new income sources) and is now pursuing reorganization.

    Mellon is now suing Choo for $4 million claiming it interfered with her business opportunities. Choo claims the case is “without merit and will be vigorously contested.”

    The freedom to operate a business and compete in the marketplace is essential to this country’s free enterprise system. Businesses are of course entitled to engage in competitive business practices, but the right is not unfettered. The basis for Mellon’s lawsuit likely is the tort of interference with business relationships. This tort protects against interference by a third party of a prospective business relationship between two companies. For a successful case, a plaintiff must prove that the party who interfered had knowledge of the expectancy and intentionally coerced the other party to terminate the relationship with plaintiff. Additionally, plaintiff must have suffered damages (monetary loss) as a result of the interference.

    In this circumstance, Mellon was apparently in discussions with various Italian manufacturers. She wanted them to produce her shoe designs in exchange for payment. Chou did business with some of those manufacturers. Mellon’s negotiations and the anticipated resulting contractual relations ended once Choo threatened to discontinue doing business with them if they became a supplier for Mellon. Since Jimmy Choo is a much larger company, better established and more well known than Mellon’s business, manufacturers caved to Choo’s demand and cut Mellon off. As a result, Mellon had trouble finding quality shoe-makers which she alleges contributed substantially to her company’s bankruptcy.

    The allegations, if proven, appear to satisfy the elements of the tort of wrongful interference with business relationships.

    For more information, click here.

    DISCUSSION QUESTION:

    Why are the alleged facts considered illegal, rather than permissible competitive activity?

     

  • Trump Sued by Pre-teen Dance Troop for Reneging on Promises; Promissory Estoppel

                      

    A new lawsuit has been commenced against Donald Trump. A troupe of *** dancers who opened for Trump at one of his rallies claims he misled them on two occasions, leading to losses in the approximate amount of $15,000.

    The dance group, named USA Freedom Girls, performed in Pensacola, Florida on January 13, 2016. The girls were adorable in red, white and blue outfits, and included in their routine the refrain, “President Donald Trump knows how to make America great.” They won the hearts of the audience, and became an immediate sensation on social media. But none of that pays the bills to transport the girls to the rally, feed them, or house them while away.  Prior to the performance, Trump’s campaign’s regional field director advised the troupe’s manager that the campaign was unable to pay the requested stipend of $2,500 to cover travel expenses.

    To encourage the group to perform, the campaign represented in an email, “We have coordinated with the event space to allow the girls to set up a table and sell their album, shirts, etc. if this is helpful to you.” The dance company calculated it could net more than $2,500 in merchandise sales and so this opportunity was part of the inducement for the dancers to attend the event and perform. The troupe’s manager invested in various promotional items to sell at the table including t-shirts, CDs, and patriotic posters. However, when the group arrived at the venue, security staff refused to allow them to bring their merchandise into the event. Thus, the sales opportunity was lost.

    The campaign invited the troupe to perform again at another event in Des Moines, Iowa, the rally that was held during the televised primary debate Trump skipped. Again the Trump campaign offered no travel expenses. The dancers’ manager no doubt figured the exposure would support online sales, and costs could be recouped that way. The troupe took a flight to Chicago and then began the five and a half hour car ride to Des Moines. En route, they received notice that the invitation to perform was being revoked. The campaign did however offer the girls seats at the rally but on the condition that none of them speak to the media. Since they had completed the bulk of the trip and already spent money on travel, they chose to attend the rally, but the gag order precluded them from enhancing their merchandise sales potential from media publicity. .

    Said the girls’ manager, “I spent money under false pretenses”. For the Trump campaign to make amends, the manager requested either a performance slot at the Republican National Convention or compensation for the losses. Neither was forthcoming, and so the lawsuit was begun.

    The basis of the lawsuit would likely be promissory estoppel. This legal rule is used where there is no formal contract but promises were made. Courts use the doctrine to prevent injustice. It precludes a person from reneging on a promise made to another or mandates compensation, if that other person reasonably and foreseeably relied on the promise and, because of the reliance, suffered a loss, usually financial. The loss is called detrimental reliance.

    The Trump campaign had promised the dancers an opportunity to sell their merchandise at the first rally, and to be in the limelight by performing at the second rally. Their troupe relied on these promises by expending money on airfare and incurring other travel expenses. The troupe will argue it relied to its determinant, and will seek to recover the money it spent based on promissory estoppel.

    For more information, click here.

    DISCUSSION QUESTION:

    Do you think the dancers will be successful in their lawsuit?  Why or why not?

  • Wells Fargo: 5300 Employees Terminated and A $190 Million Fine

     According to the Consumer Financial Protection Bureau (CFPB), Wells Fargo engaged in heavy-handed sales tactics that resulted in customers signing up for accounts they did not want and/or understand.  In addition, the CFPB alleged that in some cases Wells Fargo employees created accounts for customers without their knowledge and transferred funds from those accounts to create new services and cards. 

     Wells Fargo has entered into a consent decree, under which Wells Fargo has stated that it assumes responsibility for the actions 5300 employees took, but is not admitting that it did anything wrong.  Wells Fargo issued a statement indicating that it does not agree with the findings of the CFPB that the behaviors and actions  were the result of the bank’s “culture and business model.” Michael Corkery, “Wells fargo Agrees to Pay But Won’t Admit Misdeeds,” New York Times, September 10, 2016m p. B2.

     The bank has also agreed to contact customers and refund any fees that they were charged for unauthorized accounts. Wells fired the 5300 employees, including many managers.  Customers affected will be contacted and their rights will be explained. 

     Wells Fargo has been known for its stability, especially since the market collapse of 2008 when it emerged as one of the few banks unscathed by all the subprime mortgage instruments that felled many banks and resulted in substantial fines for those that survived.  A few weeks ago, however, Wells agreed to settle another case that involved allocation of partial payments in customers’ student loan accounts.  The allegations settled involved the application of those partial payments in a way that resulted in late fees on all loans instead of applying the funds in a way that allowed the customers to have complied on at least one of their loans.  The allegations indicated that customers were not informed of their rights related to partial payments.  Wells settled the case but maintained that the number of customers affected was small, that the practice had been halted years ago, and that the misallocation was due to a software glitch. 

     The settlement has resulted in criticism from other financial regulators because of the missing admission by Wells.  The SEC and other agencies have expressed concerns about settlements that do not require admission of wrong as being the types of settlements that encourage bad behaviors because the consequences do not involve criminal types of sanctions.

     There were about 2 million unauthorized accounts opened, and the CFPB has alleged that the accounts were opened because of the need for employees to meet difficult quarterly goals on new accounts and account services.  Wells Fargo is required to pay $5 million back to consumers who were charged fees as a result of the fake accounts opened in their names.

    However, a consent decree such as the one Wells and the CFPB have entered into serves to settle al charges, even without an admission. Nonetheless, Wells faces suits from consumers as well as from the employees who have been terminated.  The consent decree is perhaps just the beginning in terms of work for Wells, refunds for customers, and litigation from employees and customers.

    DISCUSSION STARTERS

     Explain what Wells Fargo agreed to in the consent decree.

    List the additional consequences Wells Fargo faces now that it has settled at the federal level. 

  • Race Car Driver Tony Stewart’s Insurance Company Wins Ruling in Death Case; Contract Interpretation

           

    NASCAR driver Tony Stewart is being sued by the estate of a fellow driver who Stewart hit and killed during a 2014 race. An insurance battle is underway relating to the case.

    The death of Kevin A. Ward, Jr., age 20, occurred at a race titled the Empire Super Springs on August 9, 2014. The cars driven by the two men collided mid-race, causing Ward to crash into a track wall.

    Following the crash, race officials put the race in a state of caution using yellow flags. Per NASCAR rules, this requires drivers to slow down due to a hazard on the track, customarily an accident, stopped vehicle, debris, or the like.

    Meanwhile, Ward exited his vehicle and was walking on the track. Stewart hit him with Stewart’s car, crushing Ward and flinging his body an estimated 25 feet. Ward died of his injuries. His estate (the legal entity consisting of the assets of a deceased person) is suing Stewart for wrongful death (wrongfully causing someone’s death, resulting in civil liability for the money to compensate the family for the loss of their loved one). The estate claims that Stewart was reckless in that he accelerated after the accident while the race was in caution mode, and had Stewart been going slower he could have avoided hitting Ward.

    Stewart had purchased liability insurance from Axis Insurance Company. Axis initiated a lawsuit against Stewart seeking a declaratory judgment (a court order that determines the parties’ rights in a case or determines the legal status of a law or document, or clarifies the interpretation of a law or instrument) that Axis is not required to defend Stewart in the case against him by Ward’s estate.

    The insurance dispute involves the terms of the insurance policy. There are rules of law that apply to the interpretation of contracts generally, as well as to insurance contracts. The first such rule is that contracts should be interpreted so as to give effect to the intention of the parties as expressed in unequivocal language they adopted in the written agreement. When contract provisions are unambiguous (clear, easily understood, not subject to multiple meanings) and understandable, courts are to enforce them as written. Contract language is unambiguous and understandable where the words chosen by the parties provide definite and precise meanings, and the words leave no reasonable basis for a difference of opinion.

    However, if contract terms are capable of more than one meaning when viewed objectively by reasonably intelligent people, the terms are ambiguous and further interpretation is necessary by the court.

    Stewart had a general liability policy that obligated Axis to “pay those sums that the insured [Stewart] becomes legally obligated to pay as damages because of bodily injury or property damage to which this insurance applies.” Insurance policies customarily contain endorsements (amendments to a policy that either expand or restrict the policy’s coverage). Stewart’s policy contained two endorsements that were relevant to the Ward lawsuit. One endorsement was titled “Schedule of Events” and listed 105 “Specified Events.” The endorsement then warned that “[Insurance] Coverage provided by this policy applies only to the events listed in the Schedule . . .”. This is called a race-specific endorsement. The race at which Ward was killed was not included on the list of covered events.

    A second endorsement read, “This insurance does not apply to claims or actions brought by one racing vehicle driver against another racing vehicle driver.” Ward was, like Stewart, a racing vehicle driver.

    The rule for interpreting insurance contracts with endorsements, as cited by the court, is as follows: “It is settled that in construing an endorsement to an insurance policy, the endorsement and the policy must be read together, and the words of the policy remain in full force and effect except as altered by the words of the endorsement.”

    The court ruled there is nothing ambiguous about the endorsements. It was satisfied that the “average insured, upon reading the endorsement, would have expected and understood that exposure to, and thus Axis’ possible responsibility for, insurance claims arising from team racing activities would be limited to the listed events.”

    Said the court, Stewart’s attempts to avoid this “obvious, logical construction” of the policy “simply cannot be squared with” the wording of the endorsements.

    Given the clear exclusion from insurance coverage of the event at which the death occurred, the second endorsement that eliminated coverage for claims against Stewart by another race driver became moot. Had the first endorsement not been included in the policy, this second one could likely have been determinative.

    For more information see Axis Insurance Company v. Anthony Wayne Stewart, 2016 WL 4127461 (N.D.NY.). 

    DISCUSSION QUESTION:           

    How do you think the court on appeal should rule? Why?

  • The Samsung "Fire" Phones

    When competing with Apple, what you don’t need is for your new model to be prone to fires. Such is Samsung’s fate with its newly released Galaxy Note 7. The company has discovered a flaw in the lithium-ion battery cell that could result in fires. Nor have explosions been ruled out. Discovery of the flaw means that the company must recall 2.5 million phones, a recall that is one of the largest ever in the cell phone industry.

    There have been warnings with Samsung phones previous models, about installing replacement batteries and not covering the phone, something that can cause overheating of the phone batteries. The problem is that consumers do not always read the warnings, and, for the new model, it remains unclear what is causing the fires.

     Apple is about to release its new iPhone version, something that makes the Samsung recall even more damaging. However, Samsung is left with no choice because not only is the phone defective, but the company now has knowledge of a number of incidents (35), so that any additional problems would put them in a position of more than just Section 402A strict tort product liability – the company would be liable in negligence, something that carries punitive damages. The goal, therefore, whether for strategy and competition reasons, safety, or minimizing injury, is for the company to recall, repair, and or replace as quickly as possible. There is the possibility of lost sales as Apple emerges and Samsung struggles while customers debate new phones and the possibility of switching to Apple. Another question that has arisen is whether airlines will ban the phones from flights until the problem is remedied.

    Samsung believes it will take two weeks for it to accomplish the recall, but it has not yet given a cost estimate, something that will affect share price Analysts expect the cost to be about $1 billion. Samsung owns more of its phone production facilities, something that allows it to move more quickly than Apple, which has a complex web of suppliers for parts around the world. Paul Mozur and Su-Hyun Lee, “Samsung Recalls Phone Over Risk of Battery Fire,” New York Times, September 3, 2016, p. B1.

    Batteries are a typical supply chain item, i.e., ordered by Samsung from vendors. However, as more and more battery producers have entered the market, the difficulties of tracking quality controls and production have increased. The parts vendors present a liability issue for manufacturers. That someone else made a part does not relieve the manufacturer of liability. The manufacturer is liable, but can recover from the vendor. However, when the manufacturer uses small battery vendors, the recovery is unlikely. The outsourcing issue will probably be revisited with this battery problem, by more than just Samsung.

    DISCUSSION STARTERS

    Explain the product liability theories in this case.

    Discuss the supply chain liability.