Should They Have Been Charged?
Define That Term #127

NY Court of Appeals Rejects Product Line Exception to the Rule Against Successor Liability

In Semenetz v. Sherling & Walden, Inc., 2006 NY Slip Op 04750, the Court of Appeals considered the issue of whether another exception, the "product line" exception, should be added to the exceptions outlined in Schumacher v Richards Shear Co. 59 NY2d 239 (1983).  Schumacher set forth 4 exceptions to the general rule that a corporation that purchases another corporation's assets is not liable for the seller's torts.

The Court first summarized the "product line" exception  by examining the California Supreme Court decision that created it:

The "product line" exception to the general rule against successor liability originated with the California Supreme Court's decision in Ray v Alad Corp. (19 Cal 3d 22, 560 P2d 3, 136 Cal Rptr 574 [1977]). In Ray, the court imposed liability on the successor corporation for an injury sustained by a plaintiff who fell off a ladder manufactured by its predecessor. The court concluded that successor liability was proper because "a party which acquires a manufacturing business and continues the output of its line of products under the circumstances here presented assumes strict tort liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired"...

The court articulated three rationales for the "product line" exception:   "(1) the virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business, (2) the successor's ability to assume the original manufacturer's risk-spreading role, and (3) the fairness of requiring the successor to assume a responsibility for [its predecessor's] defective products that was a burden necessarily attached to the original manufacturer's good will being enjoyed by the successor in the continued operation of the business"...

The Court of Appeals rejected each rationale: 

As for the Ray court's first rationale — the virtual destruction of the products liability plaintiff's remedies against the original manufacturer — this "is not a justification for suing the successor, but rather . . . merely a statement of the problem...

Importantly, the "product line" exception threatens "economic annihilation" for small businesses...

Further, extending liability to the corporate successor places responsibility for a defective product on a party that did not put the product into the stream of commerce. This is inconsistent with the basic justification for strict products liability...

Thus, the Court declined to adopt the "product line" exception: 

(A)doption of the "product line" exception would mark "a radical change from existing law implicating complex economic considerations better left to be addressed by the Legislature"... We therefore join the majority of courts declining to adopt the "product line" exception.

I'm on the fence on this issue.  Usually I've got an opinion either way, but in this case, I find arguments for each position equally compelling.  Thoughts?

Comments

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Ken

I agree there are very good arguments for each position. However, I am surprised that the CA rested it's decision, in part, on the economic impact to small business. Sounds like a public policy argument to me.

NBlack

Ken--you've got a good point there. But, it's not the first time public policy arguments have reared their ugly head in one of their decisions--and probably not the last. Seems to me that the Court of Appeals, and most other courts for that matter, choose to include public policy arguments if they support a holding, and conveniently choose to ignore them when they don't.

Ken

yep - we used to call that "outcome determinative" in law school!

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