Defense Counsel Journal

Product Line Liability Just Doesn't Fly

January 20, 2020

Daniel R. Campbell

Daniel R. Campbell

Daniel R. Campbell is a member of the trial group at McDermott Will & Emery in Chicago. He focuses his practice on commercial litigation matters, including collective and class actions, aviation actions, and products liability actions. Mr. Campbell has tried two federal jury trials and has argued before the Seventh Circuit Court of Appeals. He is a graduate of the University of Illinois College of Law (magna cum laude) and the University of Missouri (summa cum laude).

The author wishes to acknowledge contributions from Michael A. Pope, Michael Weaver and Timothy Farina.

A recent series of cases in the aerospace product liability space attempted to breathe new life into the product line exception to the general rule that a successor corporation is not liable for the wrongdoing of the predecessor. While all four of the most recent cases rejected the product line theory on summary judgment, the renewed invocation of the product line doctrine warrants a revisiting of it to understand why this once bourgeoning, economically-based exception to successor nonliability no longer flies in the vast majority of states. 

This article will discuss the rule of successor nonliability generally, and the commonly known exceptions to that rule. Then, the two “modern” exceptions – continuity of enterprise and product line – will be reviewed, with an in-depth analysis of the product line theory and its origins. Finally, this article will address the most recent rejection of this doctrine by the Seventh Circuit and Illinois state courts in the four recent cases involving alleged product defects in airplanes.

I. Successor Liability and Its Traditional Exceptions

As a general rule of successor liability, when a manufacturing business acquires the assets of a predecessor manufacturer, the successor is not liable for the unassumed liabilities of the predecessor whose assets it purchased.¹1 David J. Marchitelli, Annotation, Liability of Successor Corporation for Injury or Damage Caused by Product Issued by Predecessor, Based on Mere Continuation or Continuity of Enterprise Exceptions to Nonliability, 13 A.L.R. 6th 355 (2006). As with every rule, there are exceptions. For example, the successor may be liable for the predecessor’s liabilities when, in the words of the Restatement Third of Torts, “the acquisition [of the business]: (a) is accompanied by an agreement for the successor to assume such liability; or (b) results from a fraudulent conveyance to escape liability for the debts or liabilities of the predecessor; or (c) constitutes a consolidation or merger with the predecessor; or (d) results in the successor becoming a continuation of the predecessor.”²2 RESTATEMENT (THIRD) OF TORTS: PROD. LIAB. § 12 (AM. LAW. INST. 2016). The majority of courts impose strict liability on successor corporations only if one of the four above-listed exceptions apply.³3 Marchitelli, supra, n. 1.  

II. The Modern Exceptions of Continuity of Enterprise and Product Line

Over time, a small number of states have recognized two additional exceptions to the general rule of no successor liability for an asset-purchaser. Those exceptions are referred to as the continuity of enterprise, and the product line exception.

Continuity of enterprise is considered an expansion of the traditional, “mere continuation” exception to the general rule of successor non-liability as it has less rigid requirements.⁴4 Id. This exception is still a minority rule, followed by only a few jurisdictions in certain limited circumstances.⁵5 Id. (listing Alabama, Michigan, Mississippi, New Hampshire and New York as states that adopt some version of the continuity of enterprise exception). Under the mere continuation exception, “a successor may be subject to liability for the debts of its predecessor where it is found that the successor is essentially a reincarnation that is merely a ‘new hat’ for the predecessor entity.”⁶6 Id. For the mere continuation exception to apply, there must be “a continuity of ownership and control” between the successor and predecessor businesses.⁷7 Id.

Under the continuity of enterprise theory, however, “liability may also be imposed on a successor that has continued the business operations of the predecessor.”⁸8 Id. This “represents a shift of focus from the mere continuation exception, which looks to continuation of the business entity of the predecessor.”⁹9 Id. The continuity of enterprise approach focuses less on whether the legal owners of the predecessor continue to influence control over the successor company and instead “is focused on whether the successor has continued the same general business operations of the predecessor entity.”¹⁰10 Id. Accordingly, the continuity of enterprise exception “applies without regard to whether there has been a continuity of ownership by the shareholders of the predecessor.”¹¹11 Id.

The product line exception was first recognized by the California Supreme Court in Ray v. Alad Corporation.¹²12 Ray v. Alad Corp., 560 P.2d 3, 11 (Cal. 1977).  The court in Ray held that “a party which acquires a manufacturing business and continues the output of its line of products . . . 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.”¹³13 Id.  The idea behind the product line exception is that a manufacturing business that buys the manufacturing assets from another business that then dissolves may assume strict liability for defective products produced by the predecessor company. 

An example of the exception in action might be helpful. Imagine a business that manufactures a line of aircraft of a specific model. Within that product line, i.e., all airplanes that are this model/type, there are hundreds of individual aircraft with different characteristics and serial numbers. This manufacturer produces a defective unit (a defective airplane). Another manufacturer then purchases substantially all of the assets necessary to continue manufacturing the product line (the assets necessary to produce these aircraft). The product line theory says that the successor company acquires liability for injuries caused by any defective product (individual aircraft) produced by the predecessor manufacturer even though the successor company did not manufacture or sell the product or place it into the market. Like the continuity of enterprise exception, it is still a minority rule, followed by only a few jurisdictions.¹⁴14The following seven states represent the minority that has adopted the product line theory: California, Connecticut, New Jersey, New Mexico, Mississippi, Pennsylvania, and Washington.

Despite the limited adoption, the product line exception has long been a “public policy” argument for plaintiffs in jurisdictions that reject the exception, and it recently appeared in four cases in Illinois, which will be examined later in this article. In order to understand the policy rationale of the product line exception, we will provide a close review of Ray to show the policies and particular circumstances that led to the minority rule. 

III. The Extension of Liability Based on Public Policy Grounds

The plaintiff in Ray brought a strict liability suit against the defendant, Alad Corporation, for damages resulting from a defective ladder.¹⁵15 Ray, 560 P.2d at 4. The defendant—referred to throughout the case as “Alad II”—neither manufactured nor sold the defective ladder, “but prior to plaintiff’s injury succeeded to the business of the ladder’s manufacturer, the now dissolved ‘Alad Corporation’ (Alad I).”¹⁶16 Id.  Alad II purchased Alad I’s “plant, equipment, inventory, trade name, and goodwill” and “continued to manufacture the same line of ladders under the ‘Alad’ name, using the same equipment, designs, and personnel.”¹⁷17 Id.  Further, “[a]s part of the sale transaction, Alad I agreed ‘to dissolve its corporate existence as soon as practical.’”¹⁸18 Id. 

The California Supreme Court examined whether Alad II could be held strictly liable for the defective product in its role as successor to the manufacturer. The court began by considering “the rule ordinarily applied to the determination of whether a corporation purchasing the principal assets of another corporation assumes the other’s liabilities.”¹⁹19 Id. at 7. Following the general rule set forth in the Restatement Third of Torts,²⁰20 See supra, n. 2. the  California Supreme Court held that the rule allowed for liability only if:

there is an express or implied agreement or assumption, (2) the transaction amounts to a consolidation or merger of the two corporations, (3) the purchasing corporation is a mere continuation of the seller, or (4) the transfer of assets to the purchaser is for the fraudulent purpose of escaping liability for the seller’s debts.²¹21 Ray, 560 P.2d at 7.

Despite recognizing that “[n]one of the rule’s four stated grounds for imposing liability on the purchasing corporation is present,” the court nonetheless considered “whether a special departure from that rule is called for by the policies underlying strict tort liability for defective products.”²²22 Id. at 7-8.  

Ray explained that the purpose of strict tort liability for defective products “is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves.”²³23 Id. at 8. The court then held that “a party which acquires a manufacturing business and continues the output of its line of products under the circumstances [presented in this case] assumes strict liability for defects in units of the same product line previously manufactured and distributed by the entity from which the business was acquired.”²⁴24 Id. at 11. The “product line exception” to successor liability was thus born.

The Ray court enumerated three justifications for the product line exception: (1) the virtual destruction of remedies against the original manufacturer because of the dissolution of the predecessor company following the purchase of the business by the successor; (2) the successor’s ability to gauge the risks of injury from previously manufactured products and its ability to spread the cost of those risk among current purchasers of the product line; and (3) “the fact that the good will transferred to and enjoyed by [the successor] could not have been enjoyed by [the predecessor] without the burden of liability for defects in ladders sold under its aegis.”²⁵25 Id. at 5. The justifications for such an exception, as telegraphed by Ray, are that successor corporations with the risk of liability when acquiring the product line would be incentivized to produce or maintain safer products and to provide a remedy to “otherwise defenseless victims” of defective products acquired by asset purchasers.

IV. The Rejection of the Extension of Liability Based on Public Policy Grounds

While Ray offered many justifications for the product line exception, a majority of courts have rejected the exception and have refused to rely on policy justifications championed by its proponents. Many of those courts that reject the product line exception hold that the proper venue to raise the policy arguments supportive of the product line is with the legislature, not with the courts.²⁶26 See, e.g., Semenetz v. Sherling & Walden, Inc., 851 N.E.2d 1170 (N.Y. 2006) (“In short, adoption 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.’”); Winsor v. Glasswerks PHX, LLC, 63 P.3d 1040, 1047 (Ariz. Ct. App. 2003) (quoting Polius v. Clark Equip. Co., 802 F.2d 75, 83 (3d Cir. 1986)). In rejecting the product line exception, most courts are critical of Ray’s departure from the general rule of successor non-liability—as additional exceptions would only serve to chill the purchase of assets and business transfers or mergers.   

The Ray court’s first justification is that absent the product line theory, the plaintiff is without a remedy because the predecessor corporation has been dissolved. Courts have responded that “it is not the purchase by the successor corporation that deprived the plaintiff of a remedy, but rather the demise of the predecessor. Furthermore, the plaintiff’s lack of a remedy against the original manufacturers is not a justification for imposing liability on another absent fault and causation.”²⁷27Guzman v. MRM/Elgin, 567 N.E.2d 929, 931–932 (Mass. 1991) (citing Downtowner, Inc. v. Acrometal Prods., Inc., 347 N.W.2d 118, 126 (N.D. 1984); Manh Hung Nguyen v. Johnson Mach. & Press Co., 433 N.E.2d 1104 (Ill. App. Ct. 1982); Fish v. Amsted Indus., Inc., 376 N.W.2d 820 (Wis. 1985).

The second justification announced by the Ray court is that the successor has the ability to spread the risk through insurance by estimating risks in the previously manufactured product. This justification misstates the operation of insurance. Often times, an insurance policy will not cover prior sales by another company. Courts have also taken exception with the second consideration, explaining that it “overly simplifies the underlying principles of strict liability” which is “not a no-fault system of compensation.”²⁸28 Guzman, 567 N.E.2d at 932. Instead, the goal of strict liability is to “place responsibility for a defective product on the manufacturer who placed that product into commerce.”²⁹29 Id. Courts conclude that imposing strict liability upon a corporation that had no role in manufacturing or selling a product “would be contrary to this principle.”³⁰30 Id. (citing Simoneau v. South Bend Lathe, Inc., 543 A.2d 407 (N.H. 1988)); Downtowner, 347 N.W.2d at 123; Hamaker v. Kenwel-Jackson Mach., Inc., 387 N.W.2d 515, 521 (S.D. 1986); Ostrowski v. Hydra Tool Corp., 479 A.2d 126 (Vt. 1984); Domine v. Fulton Iron Works, 395 N.E.2d 19 (Ill. App. Ct. 1979).

Other courts have criticized the Ray court’s third and final justification, which is that it is fair to “require” the successor to assume the burdens as well as the benefits of the original manufacturer’s good will.”³¹31 Bernard v. Kee Mfg. Co., 409 So. 2d 1047, 1049 (Fla. 1982). Courts have noted that “[t]his argument fails to recognize that the successor paid for the predecessor’s   goodwill  at  the  asset purchase.”³²32 Guzman, 567 N.E.2d at 932. Imposing strict liability on the corporation “forc[es] the successor to pay twice for . . . goodwill.”³³33 Semenetz, 851 N.E.2d 1170 (alteration in original). The  justification  is further flawed because it assumes that a purchaser will assume a predecessor’s business, and it fails to discount that the purchase of assets that may be defective is, or can be, damaging to goodwill. Finally, assuming beneficial goodwill does not mean that a good faith purchaser should acquire the unknown and unexpected burdens of the predecessor or its products. 

In addition to criticizing the Ray court’s specific justifications for the product line theory, courts have rejected the theory as “inconsistent with elementary products liability principles, and strict liability principles in particular, in that it results in an imposition of liability without a corresponding duty.”³⁴34DeLapp v. Xtraman, Inc., 417 N.W.2d 219, 221 (Iowa 1987). As one court explained, “[t]he purpose of strict liability in tort is to place the loss caused by defective products on those who create the risk and reap the profit by placing such products in the stream of commerce.”³⁵35Kaleta v. Whittaker Corp., 583 N.E.2d 567, 573 (Ill. App. Ct. 1991). The product line theory, however, imposes liability on the successor corporation despite the fact that the successor “did not create the risk nor did it directly profit from the predecessor’s sale of the defective product; it did not solicit the use of the defective product nor make any representations as to its safety.”³⁶36 Fish, 376 N.W.2d at 827 (citing Bernard, 409 So.2d at 1050); Domine, 395 N.E.2d at 23; Jones v. Johnson Mach. & Press Co., Etc., 320 N.W.2d 481, 484 (Neb. 1982); Ostrowski, 479 A.2d at 127.

Courts rejecting this theory also frequently cite the negative policy consequences that would befall small businesses were it to be adopted. The Ray court states that its holding is in line with the “paramount policy to be promoted by [strict product liability]” which is “the protection of otherwise defenseless victims of manufacturing defects and the spreading throughout society of the cost of compensating them.”³⁷37 Ray, 560 P.2d at 8. This theory does not apply to small businesses. “[S]mall manufacturers have a difficult problem obtaining products liability insurance and find it impossible to cover the risks by raising prices because they have to compete with larger manufacturers who can keep the price down.”³⁸38 Fish, 376 N.W.2d at 827. Additionally, “it is one thing to assume that a manufacturer can acquire insurance against potential liability for its own products and another to assume it can acquire such insurance for the products made by a different manufacturer.”³⁹39 Id. One court went so far as to say, “[w]e choose not to join this vanguard of courts [adopting the product line theory], due in part to the threat of economic annihilation that small businesses would face under such a rule of expanded liability.”⁴⁰40 Bernard, 409 So. 2d at 1049.  

V. Recent Rulings Demonstrate the Correctness in Rejecting Product Line Liability

A series of recent product liability cases involving airplane accidents that were filed and litigated in Illinois federal and state courts offers the most recent rejection of the product line exception in successor liability cases. 

The four cases involved aircraft accidents in Australia, Ireland and Bolivia, and in each crash, most of the passengers and crew were killed.⁴¹41Thornton v. M7 Aerospace, LP, 796 F.3d 757, 761(7th Cir. 2015); Cruz. v. Honeywell Int’l, Inc.., No. 14 L 011437(Cir. Ct. Cook Cty); Dickens v. M7 Aerospace LLC., No. 13 L 1361(Cir. Ct. Cook Cty); Torrez. v. M7 Aerospace LLC., No. 13 L 41(Cir. Ct. Cook Cty). In each instance, the aircraft involved in the crash was designed, manufactured, and sold by Fairchild Aircraft Inc. (“Fairchild”). Prior to the accidents, a company named M7 Aerospace LLC (“M7”) purchased certain Fairchild assets out of a bankruptcy “free and clear of any liens, claims and encumbrances.”⁴²42 See, e.g., Thornton, 796 F.3d at 761. The plaintiffs in each of the cases sought the adoption of the product line theory in order to hold M7 liable. 

While Illinois had specifically rejected product line liability on numerous occasions, taking the mantle of Ray’s public policy arguments, plaintiffs argued that M7’s relationship to all Fairchild aircraft in the product line was the relevant inquiry to determine successor liability, rather than looking specifically at M7’s relationship with the accident aircraft in question. Specifically, plaintiffs argued that M7 had liability as Fairchild’s successor and that it had a duty to warn of certain alleged defects in the aircraft because  of  this relationship with the Fairchild product line.⁴³43 Id. at 761-762. The plaintiffs’ arguments were related to the analysis in Ray in that certain victims of aircraft would be without a remedy after Fairchild’s bankruptcy unless the court held M7 liable for any defects with the product line, regardless of M7’s relationship with the specific product – in this case, the accident aircraft.

In each of the four cases, the court granted summary judgment because there was an insufficient relationship or nexus between M7 and the accident aircraft operator to impose liability. The Circuit Court of Cook County declined to adopt plaintiff’s public policy arguments holding in part that Illinois courts have rejected the product line theory because the courts are in a very poor position to seek correction to social problems attendant to the sale of goods over a long period of time. While the courts recognized the potential public policy justifications for the product line theory, the courts ultimately deferred to the legislature to adopt the product line theory. The courts declined the invitation to alter judicial rejection of the doctrine in Illinois and granted summary judgment on the successor counts.

In affirming the U.S. District Court for the Northern District of Illinois’ grant of summary judgment, the Seventh Circuit affirmed the rejection of the product line exception (and Ray’s three justifications) by reaffirming that the imposition of liability is improper “where there is not a continuing relationship between the successor and owner with respect to the specific machine involved in the accident.”⁴⁴44 Id. at 767.  

VI. Conclusion

These cases illustrate, even in light of the public policy considerations set forth in Ray, and the increased focus on consumer protection since Ray was decided, that the product line exception created impermissible liability to successor manufacturers.

Today, the general rule of nonliability for a successor prevails as the majority and default rule. Below, we provide a fifty-state survey that sets forth the reported caselaw on the product line exception. Even through repeated efforts and arguments in the courts, the product line theory still has not taken flight in the vast majority of jurisdictions.

Product Line Exception to Rule of Successor Nonliability: 50-State Review

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