Designing a Smart Defense: Challenges and Defenses to Product Liability Claims Arising From Internet of Things Technology

by Blank Rome LLP
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Overview of the Internet of Things & Its Relation of Product Liability Law

The "Internet of Things" (IoT) generally refers to the network of physical devices (or "things") that are connected to the Internet, collecting and sharing data. The IoT has digitalized the physical world and has transformed common, everyday objects into smart devices that connect everything from watches to refrigerators to the Internet. In the process, the IoT revolution has brought with it previously-unimaginable benefits in the form of efficiency, convenience, safety, and savings, just to name a few. Many have called the rise of the IoT the third major technological revolution, behind the Industrial Revolution and the creation of the Internet. Today, there are a wide range of applications and devices that we use in our daily lives that are impacted by the IoT. With that said, at the present time we are just in the early stages of the IoT movement. In fact, some experts estimate that by 2020, the IoT will be comprised of somewhere between 20 and 50 billion connected devices.

In addition to the myriad of benefits that IoT technology has to offer, smart devices also present several key challenges and risks as well. First, smart technology carries with it sizeable potential security risks, as IoT devices are vulnerable to hacking and other forms of unauthorized access or use by malicious third parties. There are also privacy risks associated with smart technology, as compromised devices can lead to the unauthorized access and dissemination of sensitive, private personal information, including health and financial information. Finally, smart technology also comes with traditional defect and malfunctioning risks, as is common with all types of products.

Generally, product liability law provides that a product manufacturer, supplier, distributor, or retailer can be held liable if a defective product reaches the hands of a consumer and the defect causes personal injury or property damage. Ordinarily, product liability claims are based on state laws and are pursued under negligence, strict liability, or breach of warranty theories. The principal inquiry in connection with product liability claims is whether the injuries in question were caused by a defect. There are three primary categories of product defects that give rise to actionable product strict liability claims: (1) manufacturing defects; (2) design defects; and (3) defective or inadequate warnings. Applied to the context of the IoT revolution, the many types of different smart devices and their associated risks raise substantial issues regarding the application of traditional product liability law to these new technologies. Importantly, many of these issues may serve as significant roadblocks to plaintiffs who seek to establish actionable product liability claims as a result of malfunctions or hacking incidents related to IoT technology, all of which can be utilized by defense counsel to defend against and defeat IoT product liability litigation.

Negligence Claims

First, several challenges arise in connection with a plaintiff’s ability to pursue a negligence-based design or manufacturing defect claims, as the collective, collaborative process of developing team-designed software poses significant problems as it relates to establishing a commonly accepted duty of care. At the present time, the Federal Trade Commission is currently in the process of analyzing this issue. The FTC has filed suit against over 50 companies, alleging that these entities did not provide sufficient security to protect consumers who use their products and services. While none of these lawsuits have been resolved to date, this litigation may very well shape the standard of care for IoT devices in future litigation.

Furthermore, plaintiffs will also likely face significant challenges in connection with pursuing negligence-based failure to warn claims as well. Generally, manufacturers owe a duty to warn consumers of the reasonably foreseeable dangers created by the use of their products. Because IoT products are comprised of internet-connected devices, manufacturers have a duty to warn of the traditional dangers and hazards that may result from the use of their devices. Importantly, however, IoT technologies also carry with them a risk that third parties could access IoT devices and improperly obtain data, cause property damage, or even bring about personal injury. Here, because of the intervening cause of damage stemming from breaches of vulnerable IoT device software—that of a criminal or tortious act committed by a third party—liability may be significantly limited for hacking incidents involving smart devices, as significant questions exist as to whether a manufacturer’s duty extends to warn of the risk of breach by third-party hackers. To date, courts have not addressed whether the duty of care on the part of manufacturers extends to third-party data breaches. However, even if a risk of this nature is foreseeable, it entails the criminal actions of third-party hackers. Importantly, as a general rule most courts have concluded that a defendant has no duty of care to protect others from third-party criminal actions. Furthermore, while courts are split on whether companies owe a duty of care to safeguard third-party data that is in the actual possession of the company—for example, data stored on a computer’s IoT device—many courts have concluded that no such duty exists. As such, plaintiffs may face an uphill battle in establishing failure to warn claims in connection with the unauthorized access of their personal data stemming from an IoT device data breach.

Strict Liability Claims

In the alternative, a plaintiff could choose to pursue a strict product liability claim. Strict product liability does not involve any principles of duty or foreseeability. The fact that a product is released to customers, and a defect in the product caused injury—standing alone—is sufficient to hold a product manufacturer, supplier, distributor, or retailer liable for the damage caused.

One major challenge for plaintiffs relating to strict liability claims pertains to what test to apply to IoT-focused litigation. Given the nature of software vulnerabilities, it is likely that most insecure IoT device product liability claims would be evaluated as design defect claims. Generally, product liability law provides two differing tests to determine whether a design is defective. The first test pertains to the “risk-utility” test, which analyzes whether the foreseeable risks of harm posed by the product could have been lessened or avoided by the adoption of a reasonable or alternative design. The second test is known as the “consumer expectations” test, which asks whether the product “failed to perform as safely as an ordinary consumer would expect when used in an intended or foreseeable manner.” Courts are largely split across jurisdictions over the question of what standard to apply in design defect claims. Of the two, the consumer expectations test is likely to be the more difficult to implement to insecure software defect claims, as the test is poorly suited to address defects in complex systems. Moreover, in the event this test is applied, plaintiffs may face an uphill battle in demonstrating a defect, as defense counsel could persuasively argue that due to the pervasiveness of hacking events today, consumers should expect that hackers may be able to infiltrate their software.

Breach of Warranty Claims/End-User Licensing Agreements

Moreover, plaintiffs will also likely face significant hurdles in connection with pursuing product liability claims under the final potential avenue for compensation, which pertains to breach of warranty claims. In particular, plaintiffs will likely run up against significant roadblocks in maintaining actionable breach of warranty claims due to the stringent end-user licensing agreements that accompany nearly every smart device. In this regard, almost all IoT devices employ restrictive end-user licensing agreements which disclaim any and all liabilities stemming from software failures of their products. As such, the ability to assert a breach of warranty product liability action will be foreclosed in almost all cases.

Standing

In addition, Article III standing represents another significant issue that will undoubtedly arise in the context of IoT product liability claims. Standing stems from Article III of the United States Constitution, which limits the powers of the federal judiciary to the resolution of “cases and controversies.” To demonstrate standing in federal court, a plaintiff must satisfy a three-part test, and is required to show an: (1) injury-in-fact; (2) sufficient causal connection between the injury and the conduct complained of; and (3) a likelihood that the injury will be redressed by a favorable decision. Most importantly, a plaintiff must establish the injury-in-fact element of standing by showing an injury that is concrete and particularized and actual or imminent, not conjectural or hypothetical.

With respect to IoT devices, courts considering product liability claims have traditionally rejected plaintiffs’ claims that the access or dissemination of their personally identifiable information (PII) “diminished the value” of their PII. With that said, an actual data breach of a smart device resulting in the theft of the user’s PII may potentially constitute a sufficient injury to confer standing based on the “substantial risk of harm” resulting from the breach, although the courts are split on this issue at the present time. Of note, the Seventh Circuit Court of Appeals in Remijas v. Neiman Marcus Grp., LLC, 794 F.3d 688, 693-96 (7th Cir. 2015), has held that plaintiffs have standing based on the “substantial risk of harm” resulting from a data breach of personal payment information, and their lost time and money expended in mitigating against future identity theft.

Conversely, in Beck v. McDonald, No. 15-1395, 848 F.3d 262 (4th Cir. Feb. 6, 2017), the Fourth Circuit held that the risk of future identity theft stemming from a data breach, without more, is inadequate to demonstrate a sufficient injury-in-fact to confer Article III standing. Similarly, in in Alleruzzo v. SuperValu, Inc., No. 16-2378 (8th Cir. Aug. 30, 2017), held that an increased threat of future identity theft faced by victims of a data breach stemming from the theft of credit card information by malicious hackers was insufficient to create a cognizable injury-in-fact for purposes of Article III standing. Thus, where an IoT device is hacked and the user’s personal information stolen, the user of the device may be precluded from establishing an actionable product liability claim stemming from the data breach due to the Article III standing hurdle.

Economic Loss Doctrine

Finally, damages—and the economic loss doctrine in particular—constitutes another issue that may pose substantial challenges to plaintiffs in the context of IoT product liability claims. Under the economic loss doctrine, a plaintiff cannot recover purely economic damages that do not involve some form of physical injury or property damage. The economic loss rule works to bar the use of negligence or strict liability theories of recovery for economic losses arising out of commercial transactions where the loss is not a consequence of an event causing personal injury or damage to another's property. Importantly, the economic loss doctrine bars recovery for productivity loss, business interruption, and other common damages caused by software defects and data breaches. While states vary in the scope of their individualized economic loss doctrine, nearly every state across the nation recognizes some flavor of the economic loss rule. In this regard, only a minority of states have rejected the application of the economic loss doctrine, and as such permit a plaintiff to recover purely economic damages.

In the context of the IoT, many data breaches may cause a significant invasion of privacy, without causing any physical injury or property damage. Under such circumstances, a plaintiff’s product liability claim resulting from a data breach would be barred by the economic loss rule. Thus, even if the plaintiff was able to clear the standing hurdle discussed above by claiming an injury in the form of “increased risk of future harm” stemming from the theft of the plaintiff’s PII, in many instances the plaintiff would still be unable to maintain an actionable product liability claim due to application of the economic loss rule.

In particular, traditional software defect claims have been barred by the economic loss rule as a result of the fact that they are ordinarily predicated on damages including inoperable systems, business interruption, or other injuries connected with loss of the use of the software itself. Importantly, however, unlike defective business software, the security vulnerabilities that are commonly seen with today’s IoT devices often threaten damage to private property and create unique risk of personal injury to innocent parties, all of which would support recovery if used as the basis for a product liability claim. As such, in the context of IoT device malfunctions, as a general rule recovery will become more likely—with the economic loss rule being inapplicable—as malfunctions result in bodily injury or property damage.

The Final Word

The IoT has not only changed how we go about our day-to-day lives, but will also have a significant impact on the nature and nuances of product liability litigation as well. Given the widespread forecasts regarding the expected expansion of the IoT universe in the near future, the number of product liability claims filed in connection with smart devices will continue to increase in number as time progresses. While traditional product liability principles will generally apply to IoT defect and hacking claims, plaintiffs will face a number of challenges and obstacles to overcome in order to establish an actionable product liability claim in connection with the use of smart technology. As such, data privacy and product liability defense litigators should ensure that they stay abreast to this rapidly evolving area of law, which the courts will continue to develop and refine as IoT technology becomes even more prevalent in our everyday lives. At the same time, data privacy and product liability attorneys are well advised to add the defenses discussed above to their litigation tool belts, and should seek to deploy these robust defenses to liability and damages whenever possible.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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