According to the recent Facing the Forces
of Change Lead the Way in the Supply
written for the NAW Institute for
Distribution Excellence (www.naw.org), a popular
future trend will be wholesaler/distributors
marketing and selling their own private label products.
Private label products are products manufactured for the wholesaler-
distributor for sale under the
brand name of the wholesaler-distributor.
Private labeling may be an attractive business
strategy for a host of reasons. However, this
business opportunity has some legal and financial
risks, particularly for the U.S. wholesaler
-distributor who sources product from overseas
for resale in the U.S.
Private Label Product Liability Insurance
In the United States, any seller of any product is liable for losses, injury or damage caused by a defective product under the doctrine of strict tort liability. The injured party may file a suit against the wholesaler-distributor and it is not necessary to also sue the product manufacturer. The fact that a wholesaler-distributor did not create the defect, or did not participate in the design or production of the product, or did not author the product instructions or warnings, is no defense. This is true if the wholesaler-distributor is selling a name brand product, or if the product bears the brand name of the manufacturer.
For a private-labeler building brand value, it is critical to select a foreign supplier who will produce defect-free products that meet safety specifications and applicable U.S. legal and regulatory requirements. Field monitoring of the products produced is necessary to assure continued compliance and to detect product irregularities or unauthorized changes to the product’s design or specifications, or the raw materials used in production. Independent testing in the U.S. of randomly selected private label product samples should be considered.
Product Recall Responsibility
Federal law grants broad authority to the U.S. Consumer Product Safety Commission (CPSC) to order the recall of a defective consumer product that presents a substantial risk of injury to the public. A consumer product is broadly defined as any product offered for sale to a consumer for use in or around a household, residence, school, in recreation or otherwise. Articles that are primarily intended for use in commercial and industrial settings may nevertheless be considered a consumer product, so many items sold by a wholesaler-distributor can fall within CPSC’s jurisdiction.
The law authorizes the CPSC to order the manufacturer or any wholesaler-distributor or other seller of the product to give public notice of the defect and also give specific notice to every person to whom the product was delivered or sold. In addition to notification, the CPSC may order the manufacturer or any seller of the product to either: (1) repair the defect in the product; (2) replace the product with an equivalent product free of defects; or (3) refund an amount up to the purchase price of the product. Federal law places similar responsibilities on importers of motor vehicle parts and equipment.
In most cases it is the manufacturer that bears the responsibility and expense of a product recall. However, in cases where the manufacturer is thinly capitalized, out of business, in bankruptcy or is located in a foreign country (thus beyond CPSC’s jurisdiction), the US-based wholesaler-distributor may be the party that bears the recall expenses. The financial burden to wholesaler-distributor can be substantial.
The wholesaler-distributor can minimize this liability exposure by exercising due diligence when selecting a supplier, especially a foreign supplier, to assure that the company has insured against this risk, has recognized its recall responsibility in the supply contract, and is able to fulfill its responsibility if required. It is also prudent for the wholesaler-distributor to consider buying private label product recall insurance coverage as part of the firm’s general liability policy.
The foregoing concerns apply with equal force to a U.S.-based importer of a product, as well as a wholesaler-distributor selling a foreign-made product whether on a private label basis or under the foreign supplier’s brand name. Some precautions to mitigate these risks are discussed below.
Insurance. The wholesaler-distributor should obtain product liability insurance to cover the products it sells. Product recall insurance is also worth considering though coverage can be costly and coverage limits low. With respect to a foreign supplier, it is prudent to deal with a company that has its own adequate product liability insurance coverage that includes claims occurring in the U.S.
The wholesaler-distributor may ask the manufacturer to supply a certificate of insurance, which is a document issued by the manufacturer’s insurance company and which describes the extent of coverage and the policy term. A wholesaler-distributor may also ask to be added as an additional insured on the manufacturer’s product liability policy, although this is no substitute for the wholesaler-distributor having its own coverage.
Indemnification. As part of the supply contract with a foreign supplier, include a term whereby the supplier consents to the jurisdiction of the U.S. courts in the event a claim involving one of its products is filed here. The agreement should also contain an indemnity provision whereby the foreign supplier agrees to indemnify the wholesaler-distributor against any loss, damage or injury caused by a defective product.
This will also allow the wholesaler-distributor to bring the foreign supplier into a suit and enforce its indemnity rights. However, contractual indemnity is only as valuable as the manufacturer’s ability to pay, so it is no substitute for assuring that the foreign supplier has its own product liability insurance coverage for the U.S.