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Product Liability Law Applies to Internet Products

Credit: Blablo101, Stock/Shutterstock.com

The internet’s value arises in part from its ability to provide images, data and content quickly and at little cost. This ability results from the fact that internet products — whether they be images, data or content — are each reduced to a digital format. Sharing products that have been so reduced may result in two types of product liability: (1) providing an internet product, and (2) facilitating such providing.

Since digital formatted images, data and content, which are the basis of internet products, are intangible, internet products are not generally covered by the dictionary definition of a “product.” Consider that the typical definition of a product is an article or substance that is manufactured or refined for sale.

However, from a legal perspective, it is clear that internet products are “products” for the purposes of products liability. More specifically, the Third Restatement appears to treat internet products as products. More particularly, the Third Restatement (Restatement (Third) of Torts: Prod. Liab. §19(a) (1998)) states that products are tangible personal property distributed commercially for use or consumption. It goes on to states that tangibility is not a necessary condition, since other items are products when the context of their distribution and use is sufficiently analogous to that of tangible personal property to apply strict products liability. It also states that a product does not need to be sold outright to be a product. Thus, internet products that are licensed are still subject to products liability claims.

Courts also support the view that an internet product’s characteristics, including intangibility and being licensed, do not bar product liability treatment. Specifically, courts generally assumed a flexible definition of product, “rejecting a … dictionary definition, and instead adopting a policy-based technique to determine whether [a] transaction … deserves Section 402A protection.” Consider Lowrie v. City of Evanston, 365 N.E.2d 923 (Ill 1977), which found that a product’s liability for harm should be considered in determining whether something is a product rather than the dictionary definition of the word product.

The Restatement does not specifically opine as to whether internet products are products, but there is enough case law related to internet products (and similar electronic software products) to accurately predict a judicial response. In short, courts are willing to apply product liability when internet products result in accidents.

Some exceptions exist to the presumption that all internet products are products for liability purpose. First, courts have found that some items described as products, such as custom made software is not a product for product liability purposes. For example, when internet products are specifically created under contract for a single client, the custom-made software is a service not a product. The court in Micro-Managers v. Gregory, 434 N.W.2d 97 (Wis. 1988), found that a software purchaser’s refusal to pay could not be based on a product-liability warranty breach for the product because the contract spoke in terms used in professional services agreement. In sum, internet products, like software products that are bespoke in nature (built at the behest of—and only for—a single client) will likely be found to be services and therefore not subject to product liability.

However, customized internet products, like customized software products will likely be subject to product liability. In the case of a customized internet product, the product provider is not a service provider but rather a manufacturer of a product which may be accessed and personalized based on an internet user’s interface and data.

A company could argue that its customized interface is akin to the software in those service cases insofar as it is tailored to the client’s precise needs. Such argument might be based on analogies to RRX Indus. v. Lab-Con, 772 F.2d 543 (9th Cir. 1985), which found that training and upgrading were insufficient to classify the software product in question as services.

However, such arguments are not likely to prevail, particularly in light of the application of the Uniform Commercial Code by courts. Consider In Surplus.com v. Oracle Corp., 2010 WL 5419075 (Ill. 2010), where the court found that a software development agreement that was governed by the UCC was not a service.

More specially, the court In Surplus.com granted the defendant’s motion to dismiss, finding that the four-year statute of limitations for breach of contract under the UCC applied to the plaintiff’s claims. The court found that the custom software transactions were ancillary to the software that was the heart of the relevant agreement. Thus, the court concluded that supplying some customizing aspects to the transaction did not render the software a “service” rather than a “good” under the UCC. The courts are likely to apply such rationale to customized internet products.

Upon establishing that internet products are “products” for product liability purposes, the two most common bases for product liability should be considered: namely, providing the internet product and facilitating such providing.

The most obvious internet product liability arises from the use of said internet product as an instrument. For example, the internet product offers to differentiate among edible and poisonous mushrooms, or perform aeronautical charts function, and then fails. In such cases, product liability has been well established. The instrumental argument for finding product liability is analogous to a physical product because it performs like a physical product in its self-executing physical effect on the world.

A less obvious internet product liability arises when an entity facilitates the sharing of a defective internet product. This legal difficulty is addressed by the Communications Decency Act (CDA) (47 U.S.C. §230 (2012)). The CDA preempts state-law products liability for the shared physical product. While case law provides no definitive answer, it is entirely possible that this federal law preempts such products liability claims.

The CDA, particularly Section 230, was enacted to protect internet service providers. Specifically, it addressed concerns about liability that could accrue to internet service providers and internet platforms for claims stemming from their publication of information created by third parties.

The CDA offers sweeping immunity in all types of claims that are preempted. These preemptions include all internet-intermediated products liability claims. However, the CDA provides no immunity for original content. Thus, an internet product provider’s facilitation of the sharing of a defective internet product would not be immune from product liability action, but a third party’s use of the same facilitation (sharing a defective internet product) would be immune from product liability action.

 

Bick is of counsel at Brach Eichler in Roseland, where he handles the prosecution and litigation of complex intellectual property matters. He is also an adjunct professor at Pace and Rutgers law schools.

 

With NJ unfunded pension liability at $90B, panel advises cutting health benefits

New Jersey’s Pension and Health Benefit Study Commission has issued its final report on reforms it has said are needed to prevent public employee benefits costs from overtaking other budget priorities.

Despite unprecedented levels of funding and the dedication of state lottery revenue to the pension plans, the state’s estimated unfunded liability is now $90 billion, $10 billion more than in 2014, said commission member Tom Healey.

“While some progress has been made, it has not been enough,” Healey said. “The new governor, the legislature, public employees, and the citizens as a whole need to act to effect the comprehensive reform the commission suggests to make these benefits both affordable and secure.”

The commission has recommended that public employee health benefits be reduced and the savings be dedicated to pension payments.

Without more reforms, commission member Tom Byrne said, required pension payments won’t leave much money in the state budget for other priorities.

“We need to do it before the pension system becomes the Pac-Man that ate both the rest of the state budget — in terms of discretionary spending at least — and ate the retirement security of 800,000 New Jerseyans that depend on the pension system,” he said.

The pension funds will run dry in 12 to 14 years without additional reforms, Byrne said.

“There were certain people who wanted a stalemate until now, thinking that they would get a better deal in a new administration,” he said. “The fiscal constraints that exist aren’t going to change, and I think the sooner reality sets in about that the better off we’ll all be.”

The commission’s report is a blueprint for the next administration to consider, said Gov. Chris Christie.

“I hope this is a ‘Nixon goes to China’ situation,” he said. “I hope it’s that a Democratic administration and a Democratic legislature can speak truth to these unions and make them realize there’s no place else for them to go.”

Trump Wants NAFTA to Limit Liability of Internet Firms Including Google, Facebook

The Trump administration is pushing to add legal protections in the North American Free Trade Agreement (NAFTA) that would limit the liability of internet giants such as Google and Facebook, marking the latest in a tug-of-war as policy makers balance policing the web with protecting free speech.

U.S. Trade Representative Robert Lighthizer included the proposal in an updated U.S. wishlist for NAFTA published during the fifth round of negotiations, which ended last Tuesday. It comes as U.S. senators are advancing a bill, backed by President Donald Trump’s daughter Ivanka Trump and Facebook Inc.’s Chief Operating Officer Sheryl Sandberg, that eliminates liability protections for websites that knowingly facilitate online sex trafficking. Some other tech companies and advocates have argued such legislation threatens to undermine their industry.

The U.S. is pressuring Canada and Mexico — the country’s top two export markets — to agree to limit “civil liability of online platforms for third party content,” according to the list of U.S. negotiating priorities published Nov. 17. A major U.S. technology group, the Internet Association, had urged it to push for such language.

Canada and Mexico have rejected the U.S. proposal, according to four officials familiar with negotiations, speaking on condition of anonymity. Canada doesn’t believe that type of provision belongs in a trade agreement, and also generally opposes reducing liability for internet companies, two of the officials said.

The administration’s move is in some ways a form of protectionism — the U.S. is in effect trying to enshrine protections for Silicon Valley in a trade agreement, essentially pushing policy beyond America’s borders.

Stifle Expression

In the U.S., a 1996 law largely protects websites from liability for what their users post. Many in the tech industry say that has allowed the internet to flourish.

Because web pages involved in the sex trade cite the provisions on third-party content in their defense, a bipartisan group of more than 40 senators, led by Republican Rob Portman, have sought this year to create exemptions to the law to punish those who knowingly abet trafficking or child pornography. There is also legislation in the House.

The lawmakers argue their proposal is narrow and wouldn’t harm the larger web, while tech advocates including the Internet Association — which includes Facebook, Alphabet Inc.’s Google, Twitter Inc. and others — argued in the past it could stifle free expression and curtail good-faith efforts to self-police.

The fight over liability protections has been one of several tech headaches in Washington. Facebook and Google have received stepped-up scrutiny over Russian election interference through web platforms and questions about the size and power of their businesses, even as they quietly hope to reap the benefits of the broadly pro-business atmosphere of the Republican administration and Congress.

Senator Ron Wyden, an Oregon Democrat, pledged this month to delay the bill because it would hurt startups and stifle innovation.

While several tech groups continue to worry, the Internet Association in October reversed course on the Senate bill, lauding its compromises.

‘Detailed Consultations’

The NAFTA proposal is for cases not related to intellectual property rights, and comes with a caveat — it would be “subject to NAFTA countries’ rights to adopt non-discriminatory measures for legitimate public policy objectives.” It’s unclear what measures countries could adopt to impose liability in certain cases.

Lighthizer defended the U.S. proposal, saying it’s based on exhaustive consultations with lawmakers.

“The U.S. digital trade proposal has been informed by detailed consultations with Congress and would not prejudice the right of the United States and our Nafta partners to address important public welfare issues,” Emily Davis, a spokeswoman for Lighthizer, said.

The NAFTA dispute over so-called “safe harbor” provisions for internet companies is one of the issues holding up an agreement on NAFTA ‘s digital trade chapter, as officials from the three countries push to strike whatever deal they can as other divisive U.S. proposals loom large. The fifth round of talks ended without finalizing any new agreements, and negotiations are scheduled through March.

Health care voters turn Republican election strength into liability

Seven years after Obamacare crushed Democrats at the ballot box, the party is using health care to launch a revival, saying President Trump and congressional Republicans are paying a price for their fumbled repeal effort and will sink further next year.

Voters in Maine last week opted into Medicaid expansion, a key plank of the 2010 law, and Virginia voters pointed to health care as they swatted aside Mr. Trump’s endorsement of the Republican candidate for governor and chose Democrats up and down the ballot.

“The No. 1 issue for folks who supported our candidate was health care,” said Sen. Mark R. Warner, Virginia Democrat. “Bring it on.”

Meanwhile, Obamacare is polling better than ever, enrollments are outpacing last year’s and progressive groups are plotting to turn the fight over Obamacare into electoral wins, blanketing social media and selling $25 T-shirts and $15 coffee mugs to anyone who pledges to be a “Health Care Voter.”

It’s a major turnabout from 2010, when President Obama’s heavy mandates and D.C.-centric reforms sparked talk of “death panels” and a “government takeover” of health care.

Republicans seized control of the House that year and haven’t forfeited it. Though Mr. Obama was re-elected, Senate Republicans used Obamacare’s shaky start against Democrats in 2014 to retake the chamber, and Mr. Trump rounded out their gains by seizing the White House on a platform of repeal.

But efforts to repeal and replace Obamacare faltered out of the gate and sputtered in the Senate, leaving the Republican base empty-handed and forcing Mr. Trump to find piecemeal ways to dismantle the law before another push in the spring.

Even the spark that drove the 2010 tea party wave — Mr. Obama’s “individual mandate” to either hold health insurance or pay a tax — is becoming a hot potato for Republicans. Scorekeepers said a repeal would result in 13 million fewer insured Americans by 2027.

Repealing the mandate would save money, allowing for deeper cuts in a tax overhaul, yet Democrats — citing the fallout from Virginia elections last week — argue that Republican lawmakers will get burned if they reignite the health care fight.

“What was interesting to observe was that, overwhelmingly, the leading issue that people said they voted on was health care. And I think that the Republicans in Congress should take heed of that as they try, once again, to inject certain repeals into their tax bill,” said House Minority Leader Nancy Pelosi, California Democrat.

Health care was the most important issue for 37 percent of Virginia voters, according to NBC News’ exit poll, far exceeding gun policy (17 percent) and immigration or taxes (14 percent apiece).

Some Republicans say Democrats are boasting much too early.

Virginia has become a reliably blue state over the past decade, and it’s not as susceptible to economic swings because of federal jobs in the northern part of the state, so Mr. Trump’s populist message didn’t resonate as much as in other states, said Republican Party strategist Ford O’Connell.

“Democrats would be wise to not overinterpret what happened last week in the commonwealth,” he said. “Heading into 2018 midterms, overall health care is not the political liability it once was for Democrats. That said, the 2018 Senate map is decidedly pro-Trump and anti-Obamacare.”

Some Republicans say failure to repeal Obamacare is what suppressed their party’s voter enthusiasm in blue and purple states and that there is still time for Capitol Hill lawmakers to slash taxes on businesses and households before regrouping on health care.

Democrats, with new swagger, are betting that Republicans will pay a price even if they enact their agenda.

“A lot of people were really upset that Donald Trump and Republicans tried to take away their access to affordable health care,” Sen. Chris Van Hollen, Maryland Democrat, told “Fox News Sunday.” “And they’re going to be really mad if they try and pass this huge giveaway to huge corporations that’s going to be paid for by millions of middle-class families.”

Despite a positive Senate map, Mr. O’Connell said, health care might be a liability for some House Republicans next year, particularly in the Northeast, so the party will need a near-perfect replacement to get something through the Senate and fully change the narrative.

Until then, Republicans hope voters will hold Democrats accountable for even higher premiums and fewer choices under President Obama’s signature program.

The law fell short of enrollment targets in its early rounds, leading to a sicker-than-expected customer base. Insurers either fled the market or raised rates, causing pain for unsubsidized customers and raising the price tag for taxpayers who foot the bill for low- and middle-income enrollees.

Subsidies are more generous than ever, however, because of Mr. Trump’s decision to cancel “cost-sharing” payments, which triggered rate hikes.

As a result, Democrats say, Mr. Trump’s antipathy toward the law is the only thing holding back the program.

More than 600,000 people signed up on the federal HealthCare.gov website in the first four days alone, and several of the state-run exchanges said they have seen unusually high interest.

“We want to keep up this momentum, so we’ve got a lot of work to do to enroll even more people,” said Lori Lodes, who promoted the law under Mr. Obama and launched the “Get America Covered” campaign. “If the administration were doing everything they could to help people enroll, instead of undermining the law every chance they get, imagine how many more people would be signing up right now.”

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