Pennsylvania Supreme Court Clarifies Reach of Commonwealth’s Consumer Protection Law l Hoverboards, Magnetic Balls, and Pet Food: Products Liability in Online Sales

by McNees Wallace & Nurick LLC
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Pennsylvania Supreme Court Clarifies Reach of Commonwealth’s Consumer Protection Law

By Emily Hart

On February 21st, the Pennsylvania Supreme Court ruled that Pennsylvania’s consumer protection law allows out-of-state consumers to sue Pennsylvania-based businesses based on out-of-state transactions. In a unanimous ruling in Danganan v. Guardian Protection Services, 2018 Pa. LEXIS 9555 (Pa. 2018), the Court decided that Pennsylvania’s Unfair Trade Practices and Consumer Protection Law (UTPCPL) is not limited to Pennsylvania residents or to business conduct that occurs in Pennsylvania; rather, the UTPCPL may govern disputes over out-of-state transactions between out-of-state residents and businesses “headquartered in and operating from Pennsylvania.”

Because the UTPCPL allows for awards of triple damages plus attorneys’ fees, the law already is an attractive mechanism for plaintiffs’ lawyers targeting Pennsylvania businesses. This ruling is likely to increase substantially the number of class action lawsuits brought against Pennsylvania businesses because claims now may be brought by out-of-state consumers and on behalf of putative classes that include out-of-state consumers. This decision follows an overall trend across the United States for states to liberally construe the reach of their consumer protection laws.

The case stems from a dispute between Jobe Danganan and Guardian Protection Services (“Guardian”), a home security business headquartered in Warrendale, Pennsylvania. Danganan signed Guardian’s form contract for home security equipment and services for his Washington, D.C. home. According to the form contract’s choice-of-law provision, Pennsylvania law governed. When Danganan moved to California and attempted to cancel his contract, Guardian ignored his requests and continued to bill Danganan for services, claiming the form contract permitted this practice. Danganan filed a class action on behalf of himself and other plaintiffs who had signed the same form contract.

In its opinion, Supreme Court addressed “[w]hether a non-Pennsylvania resident may bring suit under the [UTPCPL], against a business headquartered in and operating from Pennsylvania, based on transactions which occurred outside of Pennsylvania.” The Court focused on the statutory definitions of “person,” “trade,” and “commerce,” noting there were no geographic or residency restrictions on any of these definitions.

The Court found persuasive a case from Washington State, where the Washington Supreme Court addressed a similar issue regarding the applicability of Washington’s consumer protection law to out-of-state transactions. In addressing legislative intent, the Pennsylvania Supreme Court noted that the UTPCPL’s “prescription against deceptive practices employed by Pennsylvania-based businesses may encompass misconduct that has occurred in other jurisdictions,” rejecting Guardian’s argument that there was no “sufficient nexus” between plaintiffs’ claims and Pennsylvania. Because the Court addressed the first issue in the affirmative, it passed on the second issue regarding the effect of a choice-of-law provision.

While the Court’s opinion is limited to Pennsylvania businesses as defendants, the statute itself is not limited to such defendants and does not foreclose the applicability of the UTPCPL against out-of-state businesses engaged in transactions with Pennsylvania residents. The Court noted that “choice of law rules and jurisdictional principles” reduce the concern that the Court’s decision will result in a flurry of UTPCPL cases filed against Pennsylvania businesses.

It is crucial for Pennsylvania businesses to understand the impact of the UTPCPL and this recent case. While the UTPCPL is enforced by the Attorney General, the statute allows consumers to file lawsuits against businesses. The UTPCPL prohibits twenty “unfair methods of competition” and “unfair or deceptive acts or practices,” and lists a final catch-all prohibition against “any other fraudulent or deceptive conduct which creates a likelihood of confusion or of misunderstanding.” The statute allows “any person who purchases or leases goods or services primarily for personal, family or household purposes” to recover the greater of actual damages or $100.00 and gives a court discretion to award up to three times actual damages as well as costs and attorney fees.


Hoverboards, Magnetic Balls, and Pet Food: Products Liability in Online Sales

By James Franklin, Errin McCaulley*, and Jo-Anne Thompson*

What could hoverboards, magnetic balls, and pet food possibly have in common? Each of these items has recently been at the center of heated legal disputes across the United States. Today’s hoverboards may not be what our generation was promised in Back to the Future, but some may pose a potential fire hazard. The small magnetic balls known as Buckyballs™ were a common gag gift in recent years, but a few have injured several customers. Pet owners normally expect to find grains and meats in pet food, but some owners recently discovered euthanasia drugs instead. In each case, consumers asserted products liability claims, yet many of these items were sold by online retailers, not brick-and-mortar establishments. Although Pennsylvania courts have yet to draw any meaningful distinction between online and brick-and-mortar sales, the increased prevalence of online shopping for everyday needs has created a possible gray area in products liability law. Let’s explore this gray area by discussing products liability in three common online sales structures used today.

It Takes Three (To Make Things Go Wrong)
Most everyone has probably purchased something online this year. In fact, online shopping is so common that some estimates show that one-half of U.S. households pay for the privilege of being an Amazon Prime member. Whether purchasing gifts or everyday items, most of us are familiar with popular online shopping websites such as eBay, Etsy, Amazon, and Overstock. As the number of customers relying upon online retailers (or e-retailers) has increased, so too has the number sellers and sales platforms. Online sales today generally fall into one of three different baskets: (1) one party provides every part of the transaction, specifically the product, online listing, payment, and shipping; (2) one party handles the online listing, payment, and shipping, while another party provides the product; and (3) one party handles online listing and payment, while another party provides the product and shipping.

Although Pennsylvania courts have yet to draw a distinction between these three sale structures, a customer bringing the same products liability claim may receive a different result depending upon which of the three structures the e-retailer used. Before discussing products liability under each structure more thoroughly, let’s briefly review Pennsylvania’s products liability law.

Whose Liability Is It Anyway?
Pennsylvania products liability law is unique in that it still follows the Restatement (Second) of Torts § 402a. Although the Pennsylvania Supreme Court reexamined § 402a in 2014, the Commonwealth’s products liability law remains tethered to this provision of the Restatement. Generally, a plaintiff injured by a defective product can sue all parties in the chain of distribution of the defective product, such as the manufacturer, distributor, or retailer. Products liability under § 402a is strict liability, meaning plaintiffs may hold defendants liable regardless of any precautions the defendant may have taken.

To succeed on a products liability claim, the plaintiff must prove three elements under § 402a: (1) the product was defective; (2) the defect existed when the product left the manufacturer; and (3) the defect caused the plaintiff’s injuries. Normally, a court will hold the seller of the defective product liable for a plaintiff’s injuries if the plaintiff can show that the seller’s business includes regular sales of the type of product that injured the plaintiff and the injury-causing product was not altered before it reached the plaintiff. For example, a plaintiff injured by a defective chainsaw purchased at a hardware store would have a products liability claim against both the hardware store and the manufacturer.

Interestingly, the term “seller” is not defined in the Restatement. Pennsylvania courts, however, have held that all “those engaged in the business of supplying products for use or consumption by the public” are sellers within the meaning of § 402a. For purposes of our discussion, the question then becomes one of identifying whether an e-retailer’s actions meet Pennsylvania’s definition of “seller” under § 402a.

Online Sales Basket No. 1: All-in-One Retailers
The first online sale structure consists of online retailers that list their own products on their own website, process payments made during purchases of those products, and then ship the product to the purchaser. These all-in-one retailers clearly meet the definition of “seller” followed by courts in Pennsylvania as they perform every function of a traditional, brick-and-mortar establishment. Furthermore, Pennsylvania courts have yet to draw any distinction, in the products liability context, between all-in-one retailers and brick-and-mortar retailers. Products liability actions raised against all-in-one retailers, therefore, will likely follow the same products liability analysis employed by Pennsylvania courts when the defendant is a brick-and-mortar retailer. Under this analysis, purchasers injured by defective products purchased from an all-in-one retailer will be able to hold that retailer strictly liable.

Online Sales Basket No. 2: Fulfillment Services Providers
The second online sale structure consists of fulfillment services providers that list another party’s product online, process payments for that product, and ship the product to purchasers. The important distinction between this structure and the previous structure is that the product does not belong to the fulfillment services provider, but to a third party. One common example of this structure is Amazon’s “Fulfillment by Amazon” or “FBA” service. Typically, a third party will send its products to the fulfillment services provider. When a sale is made, the fulfillment services provider will then package and ship the product from the storage location to the end user. The fulfillment services provider then takes a fee, either fixed or a percentage of the transaction, as payment for its services.

Whether a fulfillment services provider is liable for injuries caused by defective products has not been addressed by Pennsylvania courts. Where Pennsylvania courts have declined to impose liability on defendants, however, the connection between the defendant and the product was more tenuous than exists under a fulfillment services provider online sale structure. For example, in Musser v. Vilsmeier Auction Co., 562 A.2d 279 (Pa. 1989), the Pennsylvania Supreme Court refused to hold the defendant-auctioneer liable to the plaintiff when the auctioneer had only a “fleeting relationship” with the goods that harmed the plaintiff. Likewise, in Balczon v. Machinery Wholesalers Corp., 993 F. Supp. 900 (W.D. Pa. 1998), the court rejected a plaintiff’s products liability claim where the defendant-broker never took physical possession of the defective goods, nor did the broker store or move the goods. In both cases, the courts’ analyses focused upon physical possession. A court applying the same reasoning in a products liability claim against a fulfillment services provider may find the fulfillment services provider liable. Unlike the defendants in the cases cited above, fulfillment services providers have physical possession of the products, for potentially extended periods of time, before a sale is made.

Perhaps recognizing this potential liability, and to confront the possible imposition of products liability, some fulfillment services providers have required sellers using the service to sign indemnification agreements or carry minimum liability insurance. Amazon, for example, requires its professional sellers to maintain a minimum general liability policy of $1,000,000 with Amazon listed as an additional insured.

Online Sales Basket No. 3: Payment Processors
In the third sale structure, payment processors list another party’s product online and process payments during purchases. Under this setup, both the product and shipping are provided by the third party. The payment processor only receives a fixed fee or percentage of the transaction’s value. Unlike the previous two sale structures, Pennsylvania courts have addressed payment processors in the products liability context. In Inman v. Technicolor USA, Inc., 2011 U.S. Dist. LEXIS 133220 (W.D. Pa. 2011), a plaintiff sued multiple parties when he suffered mercury poisoning caused by vacuum tubes. One of the defendants, eBay, successfully argued that it was not a “seller” within the meaning of § 402(a) of the Restatement. The court agreed, noting that eBay acts as an “online forum where sellers . . . peddle their wares.” Specifically, eBay never “had anything more than a fleeting connection to the” vacuum tubes. The court granted eBay’s motion to dismiss. Similarly, the District Court for the Middle District of Pennsylvania found that Amazon was not a “seller” under § 402(a) of the Restatement. In Oberdorf v. Amazon.com, Inc., 2017 U.S. Dist. LEXIS 209899 (M.D. Pa. 2017), the plaintiff suffered severe and permanent injuries to her eye when a retractable leash she was using malfunctioned and hit her in the face. Plaintiff claimed that Amazon was strictly liable for the damage she suffered due to the company’s failure to provide adequate warnings, and the action of selling a defectively designed leash. The court relied on Musser, and stated that much like an auctioneer, “Amazon is merely a third-party vendor’s ‘means of marketing.’” Further, Amazon is “‘not equipped to pass upon the quality of the myriad of products’ available on its Marketplace.” Since Amazon has no role in selecting the goods to be sold, it cannot have an impact on how the third parties manufacture the goods. In this way, Amazon’s Marketplace feature “serves as a sort of newspaper classified ad section, connecting potential consumers with eager sellers in an efficient, modern, streamlined manner.”

The Oberdorf court also recognized that payment processors may have another defense to products liability claims. Section 230 of the federal Communications Decency Act (“CDA”), 47 U.S.C. § 230, protects “interactive computer services” (“ICSs”) from some products liability claims. Specifically, the § 230 immunity shields an ICS, such as Amazon, from claims that seek to hold the ICS liable “as a publisher or speaker of third party content.” The court noted that the strict products liability claim was already disposed of, so there was no need to decide whether Amazon was shielded under § 230 of the CDA. With respect to the negligence claims, however, the court held that the plaintiff attempted to hold Amazon liable for publishing the third-party seller’s product. Amazon was therefore being treated as “the publisher or speaker of . . . information provided by” the third party. The claims of negligence were therefore barred by § 230 of the CDA.

At least one Maryland Court has also ruled on this issue. In McDonald v. LG Electronics USA, Inc., 219 F. Supp. 3d 533 (D. Md. 2016), the court held that a plaintiff’s failure to warn claim sought to hold Amazon liable as a “speaker of third party content.” The plaintiff in McDonald had purchased a battery from a third-party seller who listed the product on Amazon’s website. The plaintiff sued Amazon, among others, when the batteries malfunctioned and injured the plaintiff. The court found the § 230 immunity applied because the third-party seller, not Amazon, posted the description of the batteries on Amazon’s website. The plaintiff’s failure to warn claim, therefore, sought to hold Amazon liable for third-party content, and the court granted Amazon’s motion to dismiss on that issue.

What’s the Bottom Line Here?
As more companies move away from the brick-and-mortar establishment to a greater online sales presence, they should remain mindful that products liability entanglements will follow. Companies with both brick-and-mortar and all-in-one online sales should continue to expect each sale structure to be treated the same from a products liability perspective.

Although payment processors are protected, at least in some instances, from products liability arising from a third party’s conduct, a split exists among the federal courts concerning the application of § 230 immunity to products liability claims. Pennsylvania courts, at least for the time being, do not consider payment processors “sellers” for products liability purposes.

Companies with large logistical networks may consider opening those networks to third-party sellers to increase profits. Although such opportunities may be lucrative, the potential liability for defective products can be significant. One way for expanding logistics companies to mitigate potential products liability risk is to adopt a minimum insurance coverage requirement for third-party sellers. The Litigation, Corporate & Tax, and Intellectual Property attorneys at McNees Wallace & Nurick regularly monitor updates regarding Pennsylvania corporate liability issues and regularly assist companies with identifying potential liabilities.

James J. Franklin is a member in the Litigation, Personal Injury, and Transportation, Distribution & Logistics practice groups at McNees Wallace & Nurick LLC.

* Errin McCaulley was a 2017 summer associate at McNees, and Jo-Anne Thompson is the 2018 winter clerk.


 

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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