Good news for companies that have recently bought or are considering buying another company: the Sixth Circuit recently ruled that successor companies may not be held liable for the predecessor company’s product defects.
In Holland v. FCA U.S., LLC, No. 15-4367 (6th Cir. 2016) defendant FCA succeeded Chrysler Group LLC after Chrysler Group filed bankruptcy. Chrysler Group had manufactured the Chrysler Pacific, the design for which was laden with defects. The vehicle’s engine cradles prematurely rusted and thus created a substantial risk of the engine falling out of the vehicle. Owners of the Chrysler Pacifica sued FCA. But the Sixth Circuit found for defendant employer, saying that FCA had neither a duty to warn vehicle owners of the product flaws nor a duty to pay for repairs to the vehicles.
Plaintiffs had claimed that FCA owed them a duty to repair the vehicle because of a letter and a technical service bulletin in which FCA warned of the defect and purportedly extended the vehicle warranty. Yet the court rejected this argument, finding that the letter was never sent to plaintiffs and thus FCA had not taken action to extend the warranty.
Plaintiffs then argued that FCA breached a duty to warn them about the vehicle’s defects. The law is that succession usually does not impose liability on a successor company, but the successor company can become liable for the product defects of a previous company if it 1. Succeeds to the predecessor’s service contracts that cover the particular machine 2. Actually services the machine 3. Is aware of the defect and 4. Knows the location of the machine’s owner. Generally, a successor company has a duty to warn if it “has entered into a relationship with the customer and derives an actual or potential economic benefit.” Schumacher v. Richards Shear Co., 451 N.E.2d. 195, 199 (1983). The court found that FCA did not meet the four part test. Plaintiffs then argued that FCA had an economic relationship with them because FCA had reason to expect plaintiffs would buy Chrysler cars in the future. But the court rejected this argument, saying that the potential that a customer might buy another car in the future is not enough to constitute an economic relationship.
What does this mean for businesses? When considering whether to purchase another company, successor companies can rest in the knowledge that, absent clear promises and actions indicating an intent to fix the products of the predecessor, they will likely not be held liable for the defects of the prior company’s products. In most cases, the successor company has no duty to warn and no duty to pay for product repairs without having clearly assumed that duty or establishing a substantial economic relationship with the owners of the defective product.
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