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This project requires you to identify and analyze legal issues and make recommendations based on one or more fact patterns.
Scenario: Deeper Depths, Inc. is a deep water oil drilling corporation headquartered in Rome, but with oceanic drilling on the east and southern coasts of the U.S. Deeper Depths transports oil to all parts of the US. Deeper Depths averages $12 million annual profits and has 300 full-time employees.
1. Evaluate and discuss all the administrative regulations that create potential liabilities for Deeper Depths related to its drilling operations and why/how.
1A. Analyze and describe several ways Deeper Depth could prevent or minimize potential liabilities related to its drilling operations.
2. Evaluate and discuss all the administrative regulations that create potential liabilities for Deeper Depths workplace and employee safety.
2A. Analyze and describe several ways Deeper Depth could prevent or minimize potential liabilities related to its workplace and employees.
Please Note: Use reference material attached, along with outside sources. Otherwise, limit your analysis and discussion to the topics and assigned resources in weeks 1,2 AND the additional resource below:
https://www.osha.gov/SLTC/oilgaswelldrilling/index.html
Format
Must use in text citations, and References list.
Must write in depth, comprehensive analysis and explanations to support conclusions.
Use legible 12-point font.
Double Space
Label all parts of assignment questions,
Third person writing is required. Third person means that there are no words such as “I, me, my, we, or us” (first person writing), nor is there use of “you or your” (second person writing). If uncertain how to write in the third person, view this link:
http://www.quickanddirtytips.com/education/grammar/first-second-and-third-person
.
Contractions are not used in business writing, so you are expected NOT to use contractions in writing this assignment.
The expectation is that you provide a robust use of the course readings attached. When using a source document, the expectation is that the information is cited and referenced with a page or paragraph number.
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Chapter 5
Administrative Law
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should be able to do the following:
1. Understand the purpose served by federal administrative
agencies.
2. Know the difference between executive branch agencies and independent
agencies.
3. Understand the political control of agencies by the president and Congress.
4. Describe how agencies make rules and conduct hearings.
5. Describe how courts can be used to challenge administrative rulings.
From the 1930s on, administrative agencies, law, and procedures have virtually remade our government
and much of private life. Every day, business must deal with rules and decisions of state and federal
administrative agencies. Informally, such rules are often called regulations, and they differ (only in their
source) from laws passed by Congress and signed into law by the president. The rules created by agencies
are voluminous: thousands of new regulations pour forth each year. The overarching question of whether
there is too much regulation—or the wrong kind of regulation—of our economic activities is an important
Chapter 5 from Advanced Business Law and the Legal Environment was adapted
by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0
license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Advanced%20Business%20Law%20and%20the%20Legal%20Environment
http://creativecommons.org/licenses/by-sa/3.0/
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one but well beyond the scope of this chapter, in which we offer an overview of the purpose of
administrative agencies, their structure, and their impact on business.
5.1 Administrative Agencies: Their Structure and
Powers
L E A R N I N G O B J E C T I V E S
1. Explain the reasons why we have federal administrative agencies.
2. Explain the difference between executive branch agencies and independent
agencies.
3. Describe the constitutional issue that questions whether administrative agencies
could have authority to make enforceable rules that affect business.
Why Have Administrative Agencies?
The US Constitution mentions only three branches of government: legislative, executive, and judicial
(Articles I, II, and III). There is no mention of agencies in the Constitution, even though federal agencies
are sometimes referred to as “the fourth branch of government.” The Supreme Court has recognized the
legitimacy of federal administrative agencies to make rules that have the same binding effect as
statutes by Congress.
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Most commentators note that having agencies with rule-making power is a practical necessity: (1)
Congress does not have the expertise or continuity to develop specialized knowledge in various areas (e.g.,
communications, the environment, aviation). (2) Because of this, it makes sense for Congress to set forth
broad statutory guidance to an agency and delegate authority to the agency to propose rules that further
the statutory purposes. (3) As long as Congress makes this delegating guidance sufficiently clear, it is not
delegating improperly. If Congress’s guidelines are too vague or undefined, it is (in essence) giving away
its constitutional power to some other group, and this it cannot do.
Why Regulate the Economy at All?
The market often does not work properly, as economists often note. Monopolies, for example, happen in
the natural course of human events but are not always desirable. To fix this, well-conceived and
objectively enforced competition law (what is called antitrust law in the United States) is needed.
Negative externalities must be “fixed,” as well. For example, as we see in tort law (Chapter 7 “Introduction
to Tort Law”), people and business organizations often do things that impose costs (damages) on others,
and the legal system will try—through the award of compensatory damages—to make fair adjustments. In
terms of the ideal conditions for a free market, think of tort law as the legal system’s attempt to
compensate for negative externalities: those costs imposed on people who have not voluntarily consented
to bear those costs.
In terms of freedoms to enter or leave the market, the US constitutional guarantees of equal protection
can prevent local, state, and federal governments from imposing discriminatory rules for commerce that
would keep minorities, women, and gay people from full participation in business. For example, if the
small town of Xenophobia, Colorado, passed a law that required all business owners and their employees
to be Christian, heterosexual, and married, the equal protection clause (as well as numerous state and
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federal equal opportunity employment laws) would empower plaintiffs to go to court and have the law
struck down as unconstitutional.
Knowing that information is power, we will see many laws administered by regulatory agencies that seek
to level the playing field of economic competition by requiring disclosure of the most pertinent
information for consumers (consumer protection laws), investors (securities laws), and citizens (e.g., the
toxics release inventory laws in environmental law).
Ideal Conditions for a Free Market
1. There are many buyers and many sellers, and none of them has a substantial share of the market.
2. All buyers and sellers in the market are free to enter the market or leave it.
3. All buyers and all sellers have full and perfect knowledge of what other buyers and sellers are up
to, including knowledge of prices, quantity, and quality of all goods being bought or sold.
4. The goods being sold in the market are similar enough to each other that participants do not have
strong preferences as to which seller or buyer they deal with.
5. The costs and benefits of making or using the goods that are exchanged in the market are borne
only by those who buy or sell those goods and not by third parties or people “external” to the
market transaction. (That is, there are no “externalities.”)
6. All buyers and sellers are utility maximizers; each participant in the market tries to get as much as
possible for as little as possible.
7. There are no parties, institutions, or governmental units regulating the price, quantity, or quality
of any of the goods being bought and sold in the market.
In short, some forms of legislation and regulation are needed to counter a tendency toward consolidation
of economic power ((Reference mayer_1.0-ch48 not found in Book)) and discriminatory attitudes toward
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certain individuals and groups ((Reference mayer_1.0-ch50 not found in Book)) and to insist that people
and companies clean up their own messes and not hide information that would empower voluntary
choices in the free market.
But there are additional reasons to regulate. For example, in economic systems, it is likely for natural
monopolies to occur. These are where one firm can most efficiently supply all of the good or service.
Having duplicate (or triplicate) systems for supplying electricity, for example, would be inefficient, so
most states have a public utilities commission to determine both price and quality of service. This is direct
regulation.
Sometimes destructive competition can result if there is no regulation. Banking and insurance are good
examples of this. Without government regulation of banks (setting standards and methods), open and
fierce competition would result in widespread bank failures. That would erode public confidence in banks
and business generally. The current situation (circa 2011) of six major banks that are “too big to fail” is,
however, an example of destructive noncompetition.
Other market imperfections can yield a demand for regulation. For example, there is a need to regulate
frequencies for public broadcast on radio, television, and other wireless transmissions (for police, fire,
national defense, etc.). Many economists would also list an adequate supply of public goods as something
that must be created by government. On its own, for example, the market would not provide public goods
such as education, a highway system, lighthouses, a military for defense.
True laissez-faire capitalism—a market free from any regulation—would not try to deal with market
imperfections and would also allow people to freely choose products, services, and other arrangements
that historically have been deemed socially unacceptable. These would include making enforceable
contracts for the sale and purchase of persons (slavery), sexual services, “street drugs” such as heroin or
crack cocaine, votes for public office, grades for this course in business law, and even marriage
partnership.
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Thus the free market in actual terms—and not in theory—consists of commerce legally constrained by
what is economically desirable and by what is socially desirable as well. Public policy objectives in the
social arena include ensuring equal opportunity in employment, protecting employees from unhealthy or
unsafe work environments, preserving environmental quality and resources, and protecting consumers
from unsafe products. Sometimes these objectives are met by giving individuals statutory rights that can
be used in bringing a complaint (e.g., Title VII of the Civil Rights Act of 1964, for employment
discrimination), and sometimes they are met by creating agencies with the right to investigate and
monitor and enforce statutory law and regulations created to enforce such law (e.g., the Environmental
Protection Agency, for bringing a lawsuit against a polluting company).
History of Federal Agencies
Through the commerce clause in the US Constitution, Congress has the power to regulate trade between
the states and with foreign nations. The earliest federal agency therefore dealt with trucking and railroads,
to literally set the rules of the road for interstate commerce. The first federal agency, the Interstate
Commerce Commission (ICC), was created in 1887. Congress delegated to the ICC the power to enforce
federal laws against railroad rate discrimination and other unfair pricing practices. By the early part of
this century, the ICC gained the power to fix rates. From the 1970s through 1995, however, Congress
passed deregulatory measures, and the ICC was formally abolished in 1995, with its powers transferred to
the Surface Transportation Board.
Beginning with the Federal Trade Commission (FTC) in 1914, Congress has created numerous other
agencies, many of them familiar actors in American government. Today more than eighty-five federal
agencies have jurisdiction to regulate some form of private activity. Most were created since 1930, and
more than a third since 1960. A similar growth has occurred at the state level. Most states now have
dozens of regulatory agencies, many of them overlapping in function with the federal bodies.
Classification of Agencies
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Independent agencies are different from federal executive departments and other executive agencies by
their structural and functional characteristics. Most executive departments have a single director,
administrator, or secretary appointed by the president of the United States. Independent agencies almost
always have a commission or board consisting of five to seven members who share power over the
agency.
The president appoints the commissioners or board subject to Senate confirmation, but they often serve
with staggered terms and often for longer terms than a usual four-year presidential term. They cannot be
removed except for “good cause.” This means that most presidents will not get to appoint all the
commissioners of a given independent agency. Most independent agencies have a statutory requirement
of bipartisan membership on the commission, so the president cannot simply fill vacancies with members
of his own political party.
In addition to the ICC and the FTC, the major independent agencies are the Federal Communications
Commission (1934), Securities and Exchange Commission (1934), National Labor Relations Board (1935),
and Environmental Protection Agency (1970). See Note 5.4 “Ideal Conditions for a Free Market” in the
sidebar.
By contrast, members of executive branch agencies serve at the pleasure of the president and are therefore
far more amenable to political control. One consequence of this distinction is that the rules that
independent agencies promulgate may not be reviewed by the president or his staff—only Congress may
directly overrule them—whereas the White House or officials in the various cabinet departments may
oversee the work of the agencies contained within them (unless specifically denied the power by
Congress).
Powers of Agencies
Agencies have a variety of powers. Many of the original statutes that created them, like the Federal
Communications Act, gave them licensing power. No party can enter into the productive activity covered
by the act without prior license from the agency—for example, no utility can start up a nuclear power
plant unless first approved by the Nuclear Regulatory Commission. In recent years, the move toward
deregulation of the economy has led to diminution of some licensing power. Many agencies also have the
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authority to set the rates charged by companies subject to the agency’s jurisdiction. Finally, the agencies
can regulate business practices. The FTC has general jurisdiction over all business in interstate commerce
to monitor and root out “unfair acts” and “deceptive practices.” The Securities and Exchange Commission
(SEC) oversees the issuance of corporate securities and other investments and monitors the practices of
the stock exchanges.
Unlike courts, administrative agencies are charged with the responsibility of carrying out a specific
assignment or reaching a goal or set of goals. They are not to remain neutral on the various issues of the
day; they must act. They have been given legislative powers because in a society growing ever more
complex, Congress does not know how to legislate with the kind of detail that is necessary, nor would it
have the time to approach all the sectors of society even if it tried. Precisely because they are to do what
general legislative bodies cannot do, agencies are specialized bodies. Through years of experience in
dealing with similar problems they accumulate a body of knowledge that they can apply to accomplish
their statutory duties.
All administrative agencies have two different sorts of personnel. The heads, whether a single
administrator or a collegial body of commissioners, are political appointees and serve for relatively
limited terms. Below them is a more or less permanent staff—the bureaucracy. Much policy making
occurs at the staff level, because these employees are in essential control of gathering facts and presenting
data and argument to the commissioners, who wield the ultimate power of the agencies.
The Constitution and Agencies
Congress can establish an agency through legislation. When Congress gives powers to an agency, the
legislation is known as an enabling act. The concept that Congress can delegate power to an agency is
known as the delegation doctrine. Usually, the agency will have all three kinds of power: executive,
legislative, and judicial. (That is, the agency can set the rules that business must comply with, can
investigate and prosecute those businesses, and can hold administrative hearings for violations of those
rules. They are, in effect, rule maker, prosecutor, and judge.) Because agencies have all three types of
governmental powers, important constitutional questions were asked when Congress first created them.
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The most important question was whether Congress was giving away its legislative power. Was the
separation of powers violated if agencies had power to make rules that were equivalent to legislative
statutes?
In 1935, in Schechter Poultry Corp. v. United States, the Supreme Court overturned the National
Industrial Recovery Act on the ground that the congressional delegation of power was too broad. [1] Under
the law, industry trade groups were granted the authority to devise a code of fair competition for the
entire industry, and these codes became law if approved by the president. No administrative body was
created to scrutinize the arguments for a particular code, to develop evidence, or to test one version of a
code against another. Thus it was unconstitutional for the Congress to transfer all of its legislative powers
to an agency. In later decisions, it was made clear that Congress could delegate some of its legislative
powers, but only if the delegation of authority was not overly broad.
Still, some congressional enabling acts are very broad, such as the enabling legislation for the
Occupational Safety and Health Administration (OSHA), which is given the authority to make rules to
provide for safe and healthful working conditions in US workplaces. Such a broad initiative power gives
OSHA considerable discretion. But, as noted in Section 5.2 “Controlling Administrative Agencies”, there
are both executive and judicial controls over administrative agency activities, as well as ongoing control by
Congress through funding and the continuing oversight of agencies, both in hearings and through
subsequent statutory amendments.
K E Y T A K E A W A Y
Congress creates administrative agencies through enabling acts. In these acts, Congress
must delegate authority by giving the agency some direction as to what it wants the
agency to do. Agencies are usually given broad powers to investigate, set standards
(promulgating regulations), and enforce those standards. Most agencies are executive
branch agencies, but some are independent.
E X E R C I S E S
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1. Explain why Congress needs to delegate rule-making authority to a specialized
agency.
2. Explain why there is any need for interference in the market by means of laws or
regulations.
[1] Schechter Poultry Corp. v. United States, 295 US 495 (1935).
5.2 Controlling Administrative Agencies
L E A R N I N G O B J E C T I V E S
1. Understand how the president controls administrative agencies.
2. Understand how Congress controls administrative agencies.
3. Understand how the courts can control administrative agencies.
During the course of the past seventy years, a substantial debate has been conducted, often in shrill terms,
about the legitimacy of administrative lawmaking. One criticism is that agencies are “captured” by the
industry they are directed to regulate. Another is that they overregulate, stifling individual initiative and
the ability to compete. During the 1960s and 1970s, a massive outpouring of federal law created many new
agencies and greatly strengthened the hands of existing ones. In the late 1970s during the Carter
administration, Congress began to deregulate American society, and deregulation increased under the
Reagan administration. But the accounting frauds of WorldCom, Enron, and others led to the Sarbanes-
Oxley Act of 2002, and the financial meltdown of 2008 has led to reregulation of the financial sector. It
remains to be seen whether the Deepwater Horizon oil blowout of 2010 will lead to more environmental
regulations or a rethinking on how to make agencies more effective regulators.
Administrative agencies are the focal point of controversy because they are policy-making bodies,
incorporating facets of legislative, executive, and judicial power in a hybrid form that fits uneasily at best
in the framework of American government (see Figure 5.1 “Major Administrative Agencies of the United
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States”). They are necessarily at the center of tugging and hauling by the legislature, the executive branch,
and the judiciary, each of which has different means of exercising political control over them. In early
1990, for example, the Bush administration approved a Food and Drug Administration regulation that
limited disease-prevention claims by food packagers, reversing a position by the Reagan administration in
1987 permitting such claims.
Figure 5.1 Major Administrative Agencies of the United States
Legislative Control
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Congress can always pass a law repealing a regulation that an agency promulgates. Because this is a time-
consuming process that runs counter to the reason for creating administrative bodies, it happens rarely.
Another approach to controlling agencies is to reduce or threaten to reduce their appropriations. By
retaining ultimate control of the purse strings, Congress can exercise considerable informal control over
regulatory policy.
Executive Control
The president (or a governor, for state agencies) can exercise considerable control over agencies that are
part of his cabinet departments and that are not statutorily defined as independent. Federal agencies,
moreover, are subject to the fiscal scrutiny of the Office of Management and Budget (OMB), subject to the
direct control of the president. Agencies are not permitted to go directly to Congress for increases in
budget; these requests must be submitted through the OMB, giving the president indirect leverage over
the continuation of administrators’ programs and policies.
Judicial Review of Agency Actions
Administrative agencies are creatures of law and like everyone else must obey the law. The courts have
jurisdiction to hear claims that the agencies have overstepped their legal authority or have acted in some
unlawful manner.
Courts are unlikely to overturn administrative actions, believing in general that the agencies are better
situated to judge their own jurisdiction and are experts in rulemaking for those matters delegated to them
by Congress. Some agency activities are not reviewable, for a number of reasons. However, after a
business (or some other interested party) has exhausted all administrative remedies, it may seek judicial
review of a final agency decision. The reviewing court is often asked to strike down or modify agency
actions on several possible bases (see Section 5.5.2 “Strategies for Obtaining Judicial Review” on
“Strategies for Obtaining Judicial Review”).
K E Y T A K E A W A Y
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Administrative agencies are given unusual powers: to legislate, investigate, and
adjudicate. But these powers are limited by executive and legislative controls and by
judicial review.
E X E R C I S E S
1. Find the website of the Consumer Product Safety Commission (CPSC). Identify from
that site a product that has been banned by the CPSC for sale in the United States.
What reasons were given for its exclusion from the US market?
2. What has Congress told the CPSC to do in its enabling act? Is this a clear enough
mandate to guide the agency? What could Congress do if the CPSC does something
that may be outside of the scope of its powers? What can an affected business do?
5.3 The Administrative Procedure Act
L E A R N I N G O B J E C T I V E S
1. Understand why the Administrative Procedure Act was needed.
2. Understand how hearings are conducted under the act.
3. Understand how the act affects rulemaking by agencies.
In 1946, Congress enacted the Administrative Procedure Act (APA). This fundamental statute
detailed for all federal administrative agencies how they must function when they are deciding cases or
issuing regulations, the two basic tasks of administration. At the state level, the Model State
Administrative Procedure Act, issued in 1946 and revised in 1961, has been adopted in twenty-eight states
and the District of Columbia; three states have adopted the 1981 revision. The other states have statutes
that resemble the model state act to some degree.
Trial-Type Hearings
Deciding cases is a major task of many agencies. For example, the Federal Trade Commission (FTC) is
empowered to charge a company with having violated the Federal Trade Commission Act. Perhaps a seller
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is accused of making deceptive claims in its advertising. Proceeding in a manner similar to a court, staff
counsel will prepare a case against the company, which can defend itself through its lawyers. The case is
tried before an administrative law judge (ALJ), formerly known as an administrative hearing
examiner. The change in nomenclature was made in 1972 to enhance the prestige of ALJs and more
accurately reflect their duties. Although not appointed for life as federal judges are, the ALJ must be free
of assignments inconsistent with the judicial function and is not subject to supervision by anyone in the
agency who carries on an investigative or prosecutorial function.
The accused parties are entitled to receive notice of the issues to be raised, to present evidence, to argue,
to cross-examine, and to appear with their lawyers. Ex parte (eks PAR-tay) communications—contacts
between the ALJ and outsiders or one party when both parties are not present—are prohibited. However,
the usual burden-of-proof standard followed in a civil proceeding in court does not apply: the ALJ is not
bound to decide in favor of that party producing the more persuasive evidence. The rule in most
administrative proceedings is “substantial evidence,” evidence that is not flimsy or weak, but is not
necessarily overwhelming evidence, either. The ALJ in most cases will write an opinion. That opinion is
not the decision of the agency, which can be made only by the commissioners or agency head. In effect,
the ALJ’s opinion is appealed to the commission itself.
Certain types of agency actions that have a direct impact on individuals need not be filtered through a full-
scale hearing. Safety and quality inspections (grading of food, inspection of airplanes) can be made on the
spot by skilled inspectors. Certain licenses can be administered through tests without a hearing (a test for
a driver’s license), and some decisions can be made by election of those affected (labor union elections).
Rulemaking
Trial-type hearings generally impose on particular parties liabilities based on past or present facts.
Because these cases will serve as precedents, they are a partial guide to future conduct by others. But they
do not directly apply to nonparties, who may argue in a subsequent case that their conduct does not fit
within the holding announced in the case. Agencies can affect future conduct far more directly by
announcing rules that apply to all who come within the agency’s jurisdiction.
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The acts creating most of the major federal agencies expressly grant them authority to engage in
rulemaking. This means, in essence, authority to legislate. The outpouring of federal regulations has been
immense. The APA directs agencies about to engage in rulemaking to give notice in
the Federal Register of their intent to do so. The Federal Register is published daily, Monday through
Friday, in Washington, DC, and contains notice of various actions, including announcements of proposed
rulemaking and regulations as adopted. The notice must specify the time, place, and nature of the
rulemaking and offer a description of the proposed rule or the issues involved. Any interested person or
organization is entitled to participate by submitting written “data, views or arguments.” Agencies are not
legally required to air debate over proposed rules, though they often do so.
The procedure just described is known as “informal” rulemaking. A different procedure is required for
“formal” rulemaking, defined as those instances in which the enabling legislation directs an agency to
make rules “on the record after opportunity for an agency hearing.” When engaging in formal rulemaking,
agencies must hold an adversary hearing.
Administrative regulations are not legally binding unless they are published. Agencies must publish in
the Federal Register the text of final regulations, which ordinarily do not become effective until thirty
days later. Every year the annual output of regulations is collected and reprinted in
the Code of Federal Regulations, a multivolume paperback series containing all federal rules and
regulations keyed to the fifty titles of the US Code (the compilation ofall federal statutes enacted by
Congress and grouped according to subject).
K E Y T A K E A W A Y
Agencies make rules that have the same effect as laws passed by Congress and the
president. But such rules (regulations) must allow for full participation by
interested parties. The Administrative Procedure Act (APA) governs both
rulemaking and the agency enforcement of regulations, and it provides a process
for fair hearings.
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E X E R C I S E S
1. Go to http://www.regulations.gov/search/Regs/home.html#home. Browse
the site. Find a topic that interests you, and then find a proposed regulation.
Notice how comments on the proposed rule are invited.
2. Why would there be a trial by an administrative agency? Describe the process.
5.4 Administrative Burdens on Business Operations
L E A R N I N G O B J E C T I V E S
1. Describe the paperwork burden imposed by administrative agencies.
2. Explain why agencies have the power of investigation, and what limits there
are to that power.
3. Explain the need for the Freedom of Information Act and how it works in the
US legal system.
The Paperwork Burden
The administrative process is not frictionless. The interplay between government agency and private
enterprise can burden business operations in a number of ways. Several of these are noted in this section.
Deciding whether and how to act are not decisions that government agencies reach out of the blue. They
rely heavily on information garnered from business itself. Dozens of federal agencies require corporations
to keep hundreds of types of records and to file numerous periodic reports. The Commission on Federal
Paperwork, established during the Ford administration to consider ways of reducing the paperwork
burden, estimated in its final report in 1977 that the total annual cost of federal paperwork amounted to
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$50 billion and that the 10,000 largest business enterprises spent $10 billion annually on paperwork
alone. The paperwork involved in licensing a single nuclear power plant, the commission said, costs
upward of $15 million.
Not surprisingly, therefore, businesses have sought ways of avoiding requests for data. Since the 1940s,
the Federal Trade Commission (FTC) has collected economic data on corporate performance from
individual companies for statistical purposes. As long as each company engages in a single line of
business, data are comparable. When the era of conglomerates began in the 1970s, with widely divergent
types of businesses brought together under the roof of a single corporate parent, the data became useless
for purposes of examining the competitive behavior of different industries. So the FTC ordered dozens of
large companies to break out their economic information according to each line of business that they
carried on. The companies resisted, but the US Court of Appeals for the District of Columbia Circuit,
where much of the litigation over federal administrative action is decided, directed the companies to
comply with the commission’s order, holding that the Federal Trade Commission Act clearly permits the
agency to collect information for investigatory purposes. [1]
In 1980, responding to cries that businesses, individuals, and state and local governments were being
swamped by federal demands for paperwork, Congress enacted the Paperwork Reduction Act. It gives
power to the federal Office of Management and Budget (OMB) to develop uniform policies for
coordinating the gathering, storage, and transmission of all the millions of reports flowing in each year to
the scores of federal departments and agencies requesting information. These reports include tax and
Medicare forms, financial loan and job applications, questionnaires of all sorts, compliance reports, and
tax and business records. The OMB was given the power also to determine whether new kinds of
information are needed. In effect, any agency that wants to collect new information from outside must
obtain the OMB’s approval.
Inspections
No one likes surprise inspections. A section of the Occupational Safety and Health Act of 1970 empowers
agents of the Occupational Safety and Health Administration (OSHA) to search work areas for safety
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hazards and for violations of OSHA regulations. The act does not specify whether inspectors are required
to obtain search warrants, required under the Fourth Amendment in criminal cases. For many years, the
government insisted that surprise inspections are not unreasonable and that the time required to obtain a
warrant would defeat the surprise element. The Supreme Court finally ruled squarely on the issue in 1978.
In Marshall v. Barlow’s, Inc., the court held that no less than private individuals, businesses are entitled
to refuse police demands to search the premises unless a court has issued a search warrant. [2]
But where a certain type of business is closely regulated, surprise inspections are the norm, and no
warrant is required. For example, businesses with liquor licenses that might sell to minors are subject to
both overt and covert inspections (e.g., an undercover officer may “search” a liquor store by sending an
underage patron to the store). Or a junkyard that specializes in automobiles and automobile parts may
also be subject to surprise inspections, on the rationale that junkyards are highly likely to be active in the
resale of stolen autos or stolen auto parts. [3]
It is also possible for inspections to take place without a search warrant and without the permission of the
business. For example, the Environmental Protection Agency (EPA) wished to inspect parts of the Dow
Chemical facility in Midland, Michigan, without the benefit of warrant. When they were refused, agents of
the EPA obtained a fairly advanced aerial mapping camera and rented an airplane to fly over the Dow
facility. Dow went to court for a restraining order against the EPA and a request to have the EPA turn over
all photographs taken. But the Supreme Court ruled that the areas photographed were “open fields” and
not subject to the protections of the Fourth Amendment. [4]
Access to Business Information in Government Files
In 1966, Congress enacted the Freedom of Information Act (FOIA), opening up to the citizenry many of
the files of the government. (The act was amended in 1974 and again in 1976 to overcome a tendency of
many agencies to stall or refuse access to their files.) Under the FOIA, any person has a legally enforceable
right of access to all government documents, with nine specific exceptions, such as classified military
intelligence, medical files, and trade secrets and commercial or financial information if “obtained from a
person and privileged or confidential.” Without the trade-secret and financial-information exemptions,
business competitors could, merely by requesting it, obtain highly sensitive competitive information
sitting in government files.
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A federal agency is required under the FOIA to respond to a document request within ten days. But in
practice, months or even years may pass before the government actually responds to an FOIA request.
Requesters must also pay the cost of locating and copying the records. Moreover, not all documents are
available for public inspection. Along with the trade-secret and financial-information exemptions, the
FOIA specifically exempts the following:
records required by executive order of the president to be kept secret in the interest of national
defense or public policy
records related solely to the internal personnel rules and practice of an agency
records exempted from disclosure by another statute
interagency memos or decisions reflecting the deliberative process
personnel files and other files that if disclosed, would constitute an unwarranted invasion of
personal privacy
information compiled for law enforcement purposes
geological information concerning wells
Note that the government may provide such information but is not required to provide such information;
it retains discretion to provide information or not.
Regulated companies are often required to submit confidential information to the government. For these
companies, submitting such information presents a danger under the FOIA of disclosure to competitors.
To protect information from disclosure, the company is well advised to mark each document as privileged
and confidential so that government officials reviewing it for a FOIA request will not automatically
disclose it. Most agencies notify a company whose data they are about to disclose. But these practices are
not legally required under the FOIA.
K E Y T A K E A W A Y
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Government agencies, in order to do their jobs, collect a great deal of information
from businesses. This can range from routine paperwork (often burdensome) to
inspections, those with warrants and those without. Surprise inspections are
allowed for closely regulated industries but are subject to Fourth Amendment
requirements in general. Some information collected by agencies can be accessed
using the Freedom of Information Act.
E X E R C I S E S
1. Give two examples of a closely regulated industry. Explain why some
warrantless searches would be allowed.
2. Find out why FOIA requests often take months or years to accomplish.
[1] In re FTC Line of Business Report Litigation, 595 F.2d 685 (D.C. Cir. 1978).
[2] Marshall v. Barlow’s, Inc., 436 US 307 (1978).
[3] New York v. Burger, 482 US 691 (1987).
[4] Dow Chemical Co. v. United States Environmental Protection Agency, 476 US 227 (1986).
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5.5 The Scope of Judicial Review
L E A R N I N G O B J E C T I V E S
1. Describe the “exhaustion of remedies” requirement.
2. Detail various strategies for obtaining judicial review of agency rules.
3. Explain under what circumstances it is possible to sue the government.
Neither an administrative agency’s adjudication nor its issuance of a regulation is necessarily final. Most
federal agency decisions are appealable to the federal circuit courts. To get to court, the appellant must
overcome numerous complex hurdles. He or she must have standing—that is, be in some sense directly
affected by the decision or regulation. The case must be ripe for review; administrative remedies such as
further appeal within the agency must have been exhausted.
Exhaustion of Administrative Remedies
Before you can complain to court about an agency’s action, you must first try to get the agency to
reconsider its action. Generally, you must have asked for a hearing at the hearing examiner level, there
must have been a decision reached that was unfavorable to you, and you must have appealed the decision
to the full board. The full board must rule against you, and only then will you be heard by a court. The
broadest exception to this exhaustion of administrative remedies requirement is if the agency had no
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authority to issue the rule or regulation in the first place, if exhaustion of remedies would be impractical
or futile, or if great harm would happen should the rule or regulation continue to apply. Also, if the agency
is not acting in good faith, the courts will hear an appeal without exhaustion.
Strategies for Obtaining Judicial Review
Once these obstacles are cleared, the court may look at one of a series of claims. The appellant might
assert that the agency’s action was ultra vires (UL-truh VI-reez)—beyond the scope of its authority as set
down in the statute. This attack is rarely successful. A somewhat more successful claim is that the agency
did not abide by its own procedures or those imposed upon it by the Administrative Procedure Act.
In formal rulemaking, the appellant also might insist that the agency lacked substantial evidence for the
determination that it made. If there is virtually no evidence to support the agency’s findings, the court
may reverse. But findings of fact are not often overturned by the courts.
Likewise, there has long been a presumption that when an agency issues a regulation, it has the authority
to do so: those opposing the regulation must bear a heavy burden in court to upset it. This is not a
surprising rule, for otherwise courts, not administrators, would be the authors of regulations.
Nevertheless, regulations cannot exceed the scope of the authority conferred by Congress on the agency.
In an important 1981 case before the Supreme Court, the issue was whether the secretary of labor, acting
through the Occupational Health and Safety Administration (OSHA), could lawfully issue a standard
limiting exposure to cotton dust in the workplace without first undertaking a cost-benefit analysis. A
dozen cotton textile manufacturers and the American Textile Manufacturers Institute, representing 175
companies, asserted that the cotton dust standard was unlawful because it did not rationally relate the
benefits to be derived from the standard to the costs that the standard would impose. See Section 5.6
“Cases”, American Textile Manufacturers Institute v. Donovan.
In summary, then, an individual or a company may (after exhaustion of administrative remedies)
challenge agency action where such action is the following:
not in accordance with the agency’s scope of authority
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not in accordance with the US Constitution or the Administrative Procedure Act
not in accordance with the substantial evidence test
unwarranted by the facts
arbitrary, capricious, an abuse of discretion, or otherwise not in accord with the law
Section 706 of the Administrative Procedure Act sets out those standards. While it is difficult to show that
an agency’s action is arbitrary and capricious, there are cases that have so held. For example, after the
Reagan administration set aside a Carter administration rule from the National Highway Traffic and
Safety Administration on passive restraints in automobiles, State Farm and other insurance companies
challenged the reversal as arbitrary and capricious. Examining the record, the Supreme Court found that
the agency had failed to state enough reasons for its reversal and required the agency to review the record
and the rule and provide adequate reasons for its reversal. State Farm and other insurance companies
thus gained a legal benefit by keeping an agency rule that placed costs on automakers for increased
passenger safety and potentially reducing the number of injury claims from those it had insured. [1]
Suing the Government
In the modern administrative state, the range of government activity is immense, and administrative
agencies frequently get in the way of business enterprise. Often, bureaucratic involvement is wholly
legitimate, compelled by law; sometimes, however, agencies or government officials may overstep their
bounds, in a fit of zeal or spite. What recourse does the private individual or company have?
Mainly for historical reasons, it has always been more difficult to sue the government than to sue private
individuals or corporations. For one thing, the government has long had recourse to the doctrine of
sovereign immunity as a shield against lawsuits. Yet in 1976, Congress amended the Administrative
Procedure Act to waive any federal claim to sovereign immunity in cases of injunctive or other
nonmonetary relief. Earlier, in 1946, in the Federal Tort Claims Act, Congress had waived sovereign
immunity of the federal government for most tort claims for money damages, although the act contains
several exceptions for specific agencies (e.g., one cannot sue for injuries resulting from fiscal operations of
the Treasury Department or for injuries stemming from activities of the military in wartime). The act also
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contains a major exception for claims “based upon [an official’s] exercise or performance or the failure to
exercise or perform a discretionary function or duty.” This exception prevents suits against parole boards
for paroling dangerous criminals who then kill or maim in the course of another crime and suits against
officials whose decision to ship explosive materials by public carrier leads to mass deaths and injuries
following an explosion en route. [2]
In recent years, the Supreme Court has been stripping away the traditional immunity enjoyed by many
government officials against personal suits. Some government employees—judges, prosecutors,
legislators, and the president, for example—have absolute immunity against suit for official actions. But
many public administrators and government employees have at best a qualified immunity. Under a
provision of the Civil Rights Act of 1871 (so-called Section 1983 actions), state officials can be sued in
federal court for money damages whenever “under color of any state law” they deprive anyone of his
rights under the Constitution or federal law. In Bivens v. Six Unknown Federal Narcotics Agents, the
Supreme Court held that federal agents may be sued for violating the plaintiff’s Fourth Amendment rights
against an unlawful search of his home. [3] Subsequent cases have followed this logic to permit suits for
violations of other constitutional provisions. This area of the law is in a state of flux, and it is likely to
continue to evolve.
Sometimes damage is done to an individual or business because the government has given out erroneous
information. For example, suppose that Charles, a bewildered, disabled navy employee, is receiving a
federal disability annuity. Under the regulations, he would lose his pension if he took a job that paid him
in each of two succeeding years more than 80 percent of what he earned in his old navy job. A few years
later, Congress changed the law, making him ineligible if he earned more than 80 percent in anyone year.
For many years, Charles earned considerably less than the ceiling amount. But then one year he got the
opportunity to make some extra money. Not wishing to lose his pension, he called an employee relations
specialist in the US Navy and asked how much he could earn and still keep his pension. The specialist
gave him erroneous information over the telephone and then sent him an out-of-date form that said
Charles could safely take on the extra work. Unfortunately, as it turned out, Charles did exceed the salary
limit, and so the government cut off his pension during the time he earned too much. Charles sues to
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recover his lost pension. He argues that he relied to his detriment on false information supplied by the
navy and that in fairness the government should be estopped from denying his claim.
Unfortunately for Charles, he will lose his case. In Office of Personnel Management v. Richmond, the
Supreme Court reasoned that it would be unconstitutional to permit recovery. [4] The appropriations
clause of Article I says that federal money can be paid out only through an appropriation made by law.
The law prevented this particular payment to be made. If the court were to make an exception, it would
permit executive officials in effect to make binding payments, even though unauthorized, simply by
misrepresenting the facts. The harsh reality, therefore, is that mistakes of the government are generally
held against the individual, not the government, unless the law specifically provides for recompense (as,
for example, in the Federal Tort Claims Act just discussed).
K E Y T A K E A W A Y
After exhausting administrative remedies, there are numerous grounds for seeking
judicial review of an agency’s order or of a final rule. While courts defer to agencies to
some degree, an agency must follow its own rules, comply with the Administrative
Procedure Act, act within the scope of its delegated authority, avoid acting in an
arbitrary manner, and make final rules that are supported by substantial evidence.
E X E R C I S E S
1. Why would US courts require that someone seeking judicial review of an agency
order first exhaust administrative remedies?
2. On the Internet, find a case where someone has successfully sued the US
government under the Federal Tort Claims Act. What kind of case was it? Did the
government argue sovereign immunity? Does sovereign immunity even make sense
to you?
[1] Motor Vehicle Manufacturers’ Assn. v. State Farm Mutual Ins., 463 US 29 (1983).
[2] Dalehite v. United States, 346 US 15 (1953).
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[3] Bivens v. Six Unknown Federal Narcotics Agents, 403 US 388 (1971).
[4] Office of Personnel Management v. Richmond, 110 S. Ct. 2465 (1990).
5.6 Cases
Marshall v. Barlow’s, Inc.
Marshall v. Barlow’s, Inc.
436 U.S. 307 (U.S. Supreme Court 1978)
MR. JUSTICE WHITE delivered the opinion of the Court.
Section 8(a) of the Occupational Safety and Health Act of 1970 (OSHA or Act) empowers agents of the
Secretary of Labor (Secretary) to search the work area of any employment facility within the Act’s
jurisdiction. The purpose of the search is to inspect for safety hazards and violations of OSHA regulations.
No search warrant or other process is expressly required under the Act.
On the morning of September 11, 1975, an OSHA inspector entered the customer service area of Barlow’s,
Inc., an electrical and plumbing installation business located in Pocatello, Idaho. The president and
general manager, Ferrol G. “Bill” Barlow, was on hand; and the OSHA inspector, after showing his
credentials, informed Mr. Barlow that he wished to conduct a search of the working areas of the business.
Mr. Barlow inquired whether any complaint had been received about his company. The inspector
answered no, but that Barlow’s, Inc., had simply turned up in the agency’s selection process. The inspector
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again asked to enter the nonpublic area of the business; Mr. Barlow’s response was to inquire whether the
inspector had a search warrant.
The inspector had none. Thereupon, Mr. Barlow refused the inspector admission to the employee area of
his business. He said he was relying on his rights as guaranteed by the Fourth Amendment of the United
States Constitution.
Three months later, the Secretary petitioned the United States District Court for the District of Idaho to
issue an order compelling Mr. Barlow to admit the inspector. The requested order was issued on
December 30, 1975, and was presented to Mr. Barlow on January 5, 1976. Mr. Barlow again refused
admission, and he sought his own injunctive relief against the warrantless searches assertedly permitted
by OSHA.…The Warrant Clause of the Fourth Amendment protects commercial buildings as well as
private homes. To hold otherwise would belie the origin of that Amendment, and the American colonial
experience.
An important forerunner of the first 10 Amendments to the United States Constitution, the Virginia Bill of
Rights, specifically opposed “general warrants, whereby an officer or messenger may be commanded to
search suspected places without evidence of a fact committed.” The general warrant was a recurring point
of contention in the Colonies immediately preceding the Revolution. The particular offensiveness it
engendered was acutely felt by the merchants and businessmen whose premises and products were
inspected for compliance with the several parliamentary revenue measures that most irritated the
colonists.…
* * *
This Court has already held that warrantless searches are generally unreasonable, and that this rule
applies to commercial premises as well as homes. In Camara v. Municipal Court, we held:
[E]xcept in certain carefully defined classes of cases, a search of private property without proper consent
is ‘unreasonable’ unless it has been authorized by a valid search warrant.
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On the same day, we also ruled: As we explained in Camara, a search of private houses is presumptively
unreasonable if conducted without a warrant. The businessman, like the occupant of a residence, has a
constitutional right to go about his business free from unreasonable official entries upon his private
commercial property. The businessman, too, has that right placed in jeopardy if the decision to enter and
inspect for violation of regulatory laws can be made and enforced by the inspector in the field without
official authority evidenced by a warrant. These same cases also held that the Fourth Amendment
prohibition against unreasonable searches protects against warrantless intrusions during civil as well as
criminal investigations. The reason is found in the “basic purpose of this Amendment…[which] is to
safeguard the privacy and security of individuals against arbitrary invasions by governmental officials.” If
the government intrudes on a person’s property, the privacy interest suffers whether the government’s
motivation is to investigate violations of criminal laws or breaches of other statutory or regulatory
standards.…
[A]n exception from the search warrant requirement has been recognized for “pervasively regulated
business[es],” United States v. Biswell, 406 U.S. 311, 316 (1972), and for “closely regulated” industries
“long subject to close supervision and inspection,” Colonnade Catering Corp. v. United States, 397 U.S.
72, 74, 77 (1970). These cases are indeed exceptions, but they represent responses to relatively unique
circumstances. Certain industries have such a history of government oversight that no reasonable
expectation of privacy could exist for a proprietor over the stock of such an enterprise. Liquor
(Colonnade) and firearms (Biswell) are industries of this type when an entrepreneur embarks upon such a
business, he has voluntarily chosen to subject himself to a full arsenal of governmental regulation.
* * *
The clear import of our cases is that the closely regulated industry of the type involved
in Colonnade and Biswell is the exception. The Secretary would make it the rule. Invoking the Walsh-
Healey Act of 1936, 41 U.S.C. § 35 et seq., the Secretary attempts to support a conclusion that all
businesses involved in interstate commerce have long been subjected to close supervision of employee
safety and health conditions. But…it is quite unconvincing to argue that the imposition of minimum
wages and maximum hours on employers who contracted with the Government under the Walsh-Healey
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Act prepared the entirety of American interstate commerce for regulation of working conditions to the
minutest detail. Nor can any but the most fictional sense of voluntary consent to later searches be found in
the single fact that one conducts a business affecting interstate commerce. Under current practice and
law, few businesses can be conducted without having some effect on interstate commerce.
* * *
The critical fact in this case is that entry over Mr. Barlow’s objection is being sought by a Government
agent. Employees are not being prohibited from reporting OSHA violations. What they observe in their
daily functions is undoubtedly beyond the employer’s reasonable expectation of privacy. The Government
inspector, however, is not an employee. Without a warrant he stands in no better position than a member
of the public. What is observable by the public is observable, without a warrant, by the Government
inspector as well. The owner of a business has not, by the necessary utilization of employees in his
operation, thrown open the areas where employees alone are permitted to the warrantless scrutiny of
Government agents. That an employee is free to report, and the Government is free to use, any evidence of
noncompliance with OSHA that the employee observes furnishes no justification for federal agents to
enter a place of business from which the public is restricted and to conduct their own warrantless search.
* * *
[The District Court judgment is affirmed.]
C A S E Q U E S T I O N S
1. State, as briefly and clearly as possible, the argument that Barlow’s is making
in this case.
2. Why would some industries or businesses be “closely regulated”? What are
some of those businesses?
3. The Fourth Amendment speaks of “people” being secure in their “persons,
houses, papers, and effects.” Why would the Fourth Amendment apply to a
business, which is not in a “house”?
4. If the Fourth Amendment does not distinguish between closely regulated
industries and those that are not, why does the court do so?
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American Textile Manufacturers Institute v. Donovan
American Textile Manufacturers Institute v. Donovan
452 U.S. 490 (1981)
JUSTICE BRENNAN delivered the opinion of the Court.
Congress enacted the Occupational Safety and Health Act of 1970 (Act) “to assure so far as possible every
working man and woman in the Nation safe and healthful working conditions.…“The Act authorizes the
Secretary of Labor to establish, after notice and opportunity to comment, mandatory nationwide
standards governing health and safety in the workplace. In 1978, the Secretary, acting through the
Occupational Safety and Health Administration (OSHA), promulgated a standard limiting occupational
exposure to cotton dust, an airborne particle byproduct of the preparation and manufacture of cotton
products, exposure to which produces a “constellation of respiratory effects” known as “byssinosis.” This
disease was one of the expressly recognized health hazards that led to passage of the Act.
Petitioners in these consolidated cases representing the interests of the cotton industry, challenged the
validity of the “Cotton Dust Standard” in the Court of Appeals for the District of Columbia Circuit
pursuant to § 6 (f) of the Act, 29 U.S.C. § 655 (f). They contend in this Court, as they did below, that the
Act requires OSHA to demonstrate that its Standard reflects a reasonable relationship between the costs
and benefits associated with the Standard. Respondents, the Secretary of Labor and two labor
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organizations, counter that Congress balanced the costs and benefits in the Act itself, and that the Act
should therefore be construed not to require OSHA to do so. They interpret the Act as mandating that
OSHA enact the most protective standard possible to eliminate a significant risk of material health
impairment, subject to the constraints of economic and technological feasibility.
The Court of Appeals held that the Act did not require OSHA to compare costs and benefits.
We granted certiorari, 449 U.S. 817 (1980), to resolve this important question, which was presented but
not decided in last Term’sIndustrial Union Dept. v. American Petroleum Institute, 448 U.S. 607 (1980),
and to decide other issues related to the Cotton Dust Standard.
* * *
Not until the early 1960’s was byssinosis recognized in the United States as a distinct occupational hazard
associated with cotton mills. In 1966, the American Conference of Governmental Industrial Hygienists
(ACGIH), a private organization, recommended that exposure to total cotton dust be limited to a
“threshold limit value” of 1,000 micrograms per cubic meter of air (1,000 g/m3.) averaged over an 8-hour
workday. See 43 Fed. Reg. 27351, col. 1 (1978). The United States Government first regulated exposure to
cotton dust in 1968, when the Secretary of Labor, pursuant to the Walsh-Healey Act, 41 U.S.C. 35 (e),
promulgated airborne contaminant threshold limit values, applicable to public contractors, that included
the 1,000 g/m3 limit for total cotton dust. 34 Fed. Reg. 7953 (1969). Following passage of the Act in 1970,
the 1,000 g/m3. standard was adopted as an “established Federal standard” under 6 (a) of the Act, 84 Stat.
1593, 29 U.S.C. 655 (a), a provision designed to guarantee immediate protection of workers for the period
between enactment of the statute and promulgation of permanent standards.
That same year, the Director of the National Institute for Occupational Safety and Health (NIOSH),
pursuant to the Act, 29 U.S.C. §§ 669(a)(3), 671 (d)(2), submitted to the Secretary of Labor a
recommendation for a cotton dust standard with a permissible exposure limit (PEL) that “should be set at
the lowest level feasible, but in no case at an environmental concentration as high as 0.2 mg lint-free
cotton dust/cu m,” or 200 g/m3. of lint-free respirable dust. Several months later, OSHA published an
Advance Notice of Proposed Rulemaking, 39 Fed.Reg. 44769 (1974), requesting comments from
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interested parties on the NIOSH recommendation and other related matters. Soon thereafter, the Textile
Worker’s Union of America, joined by the North Carolina Public Interest Research Group, petitioned the
Secretary, urging a more stringent PEL of 100 g/m3.
On December 28, 1976, OSHA published a proposal to replace the existing federal standard on cotton dust
with a new permanent standard, pursuant to § 6(b)(5) of the Act, 29 U.S.C. § 655(b)(5). 41 Fed.Reg.
56498. The proposed standard contained a PEL of 200 g/m3of vertical elutriated lint-free respirable
cotton dust for all segments of the cotton industry. Ibid. It also suggested an implementation strategy for
achieving the PEL that relied on respirators for the short term and engineering controls for the long-term.
OSHA invited interested parties to submit written comments within a 90-day period.
* * *
The starting point of our analysis is the language of the statute itself. Section 6(b)(5) of the Act, 29 U.S.C.
§ 655(b)(5) (emphasis added), provides:
The Secretary, in promulgating standards dealing with toxic materials or harmful physical agents under
this subsection, shall set the standard which most adequately assures, to the extent feasible, on the
basis of the best available evidence, that no employee will suffer material impairment of health or
functional capacity even if such employee has regular exposure to the hazard dealt with by such standard
for the period of his working life. Although their interpretations differ, all parties agree that the phrase “to
the extent feasible” contains the critical language in § 6(b)(5) for purposes of these cases.
The plain meaning of the word “feasible” supports respondents’ interpretation of the statute. According to
Webster’s Third New International Dictionary of the English Language 831 (1976), “feasible” means
“capable of being done, executed, or effected.” In accord, the Oxford English Dictionary 116 (1933)
(“Capable of being done, accomplished or carried out”); Funk & Wagnalls New “Standard” Dictionary of
the English Language 903 (1957) (“That may be done, performed or effected”). Thus, § 6(b)(5) directs the
Secretary to issue the standard that “most adequately assures…that no employee will suffer material
impairment of health,” limited only by the extent to which this is “capable of being done.” In effect then,
as the Court of Appeals held, Congress itself defined the basic relationship between costs and benefits, by
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placing the “benefit” of worker health above all other considerations save those making attainment of this
“benefit” unachievable. Any standard based on a balancing of costs and benefits by the Secretary that
strikes a different balance than that struck by Congress would be inconsistent with the command set forth
in § 6(b)(5). Thus, cost-benefit analysis by OSHA is not required by the statute because feasibility analysis
is.
When Congress has intended that an agency engage in cost-benefit analysis, it has clearly indicated such
intent on the face of the statute. One early example is the Flood Control Act of 1936, 33 U.S.C. § 701:
[T]he Federal Government should improve or participate in the improvement of navigable waters or their
tributaries, including watersheds thereof, for flood control purposes if the benefits to whomsoever
they may accrue are in excess of the estimated costs, and if the lives and social security of people
are otherwise adversely affected. (emphasis added)
A more recent example is the Outer Continental Shelf Lands Act Amendments of 1978, providing that
offshore drilling operations shall use the best available and safest technologies which the Secretary
determines to be economically feasible, wherever failure of equipment would have a significant effect on
safety, health, or the environment, except where the Secretary determines that the incremental benefits
are clearly insufficient to justify the incremental costs of using such technologies.
These and other statutes demonstrate that Congress uses specific language when intending that an agency
engage in cost-benefit analysis. Certainly in light of its ordinary meaning, the word “feasible” cannot be
construed to articulate such congressional intent. We therefore reject the argument that Congress
required cost-benefit analysis in § 6(b)(5).
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C A S E Q U E S T I O N S
1. What is byssinosis? Why should byssinosis be anything that the textile
companies are responsible for, ethically or legally? If it is well-known that
textile workers get cotton dust in their systems and develop brown lung, don’t
they nevertheless choose to work there and assume the risk of all injuries?
2. By imposing costs on the textile industry, what will be the net effect on US
textile manufacturing jobs?
3. How is byssinosis a “negative externality” that is not paid for by either the
manufacturer or the consumer of textile products? How should the market, to
be fair and efficient, adjust for these negative externalities other than by
setting a reasonable standard that shares the burden between manufacturers
and their employees? Should all the burden be on the manufacturer?
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5.7 Summary and Exercises
Summary
Administrative rules and regulations constitute the largest body of laws that directly affect business.
These regulations are issued by dozens of federal and state agencies that regulate virtually every aspect of
modern business life, including the natural environment, corporate finance, transportation,
telecommunications, energy, labor relations, and trade practices. The administrative agencies derive their
power to promulgate regulations from statutes passed by Congress or state legislatures.
The agencies have a variety of powers. They can license companies to carry on certain activities or prohibit
them from doing so, lay down codes of conduct, set rates that companies may charge for their services,
and supervise various aspects of business.
E X E R C I S E S
1. The Equal Employment Opportunity Commission seeks data about the racial
composition of Terrific Textiles’ labor force. Terrific refuses on the grounds that
inadvertent disclosure of the numbers might cause certain “elements” to picket its
factories. The EEOC takes Terrific to court to get the data. What is the result?
2. In order to police the profession, the state legislature has just passed a law
permitting the State Plumbers’ Association the power to hold hearings to determine
whether a particular plumber has violated the plumbing code of ethics, written by
the association. Sam, a plumber, objects to the convening of a hearing when he is
accused by Roger, a fellow plumber, of acting unethically by soliciting business from
Roger’s customers. Sam goes to court, seeking to enjoin the association’s
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disciplinary committee from holding the hearing. What is the result? How would you
argue Sam’s case? The association’s case?
3. Assume that the new president of the United States was elected overwhelmingly by
pledging in his campaign to “do away with bureaucrats who interfere in your lives.”
The day he takes the oath of office he determines to carry out his pledge. Discuss
which of the following courses he may lawfully follow: (a) Fire all incumbent
commissioners of federal agencies in order to install new appointees. (b) Demand
that all pending regulations being considered by federal agencies be submitted to
the White House for review and redrafting, if necessary. (c) Interview potential
nominees for agency positions to determine whether their regulatory philosophy is
consistent with his.
4. Dewey owned a mine in Wisconsin. He refused to allow Department of Labor agents
into the mine to conduct warrantless searches to determine whether previously
found safety violations had been corrected. The Federal Mine Safety and Health
Amendments Act of 1977 authorizes four warrantless inspections per year. Is the
provision for warrantless inspections by this agency constitutional? [1]
5. In determining the licensing requirements for nuclear reactors, the Nuclear
Regulatory Commission (NRC) adopted a zero-release assumption: that the
permanent storage of certain nuclear waste would have no significant
environmental impact and that potential storage leakages should not be a factor
discussed in the appropriate environmental impact statement (EIS) required before
permitting construction of a nuclear power plant. This assumption is based on the
NRC’s belief that technology would be developed to isolate the wastes from the
environment, and it was clear from the record that the NRC had “digested a massive
material and disclosed all substantial risks” and had considered that the zero-release
assumption was uncertain. There was a remote possibility of contamination by
water leakage into the storage facility. An environmental NGO sued, asserting that
the NRC had violated the regulations governing the EIS by arbitrarily and capriciously
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ignoring the potential contamination. The court of appeals agreed, and the power
plant appealed. Had the NRC acted arbitrarily and capriciously? [2]
S E L F – T E S T Q U E S T I O N S
1. Most federal administrative agencies are created by
a. an executive order by the president
b. a Supreme Court decision
c. the passage of enabling legislation by Congress, signed by the president
d. a and c
The Federal Trade Commission, like most administrative agencies of the federal
government, is part of
a. the executive branch of government
b. the legislative branch of government
c. the judicial branch of government
d. the administrative branch of government
In the Clean Water Act, Congress sets broad guidelines, but it is the
Environmental Protection Agency that proposes rules to regulate industrial
discharges. Where do proposed rules originally appear?
a. in the Congressional record
b. in the Federal Register
c. in the Code of Federal Regulations
d. in the United States code service
The legal basis for all administrative law, including regulations of the Federal
Trade Commission, is found in
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a. the Administrative Procedure Act
b. the US Constitution
c. the commerce clause
d. none of the above
The Federal Trade Commission, like other administrative agencies, has the
power to
a. issue proposed rules
b. undertake investigations of firms that may have violated FTC regulations
c. prosecute firms that have violated FTC regulations
d. none of the above
e. all of the above
S E L F – T E S T A N S W E R S
1. c
2. a
3. b
4. b
5. e
[1] Donovan v. Dewey, 452 US 594 (1981).
[2] Baltimore Gas and Electric Co. v. Natural Resources Defense Council Inc., 462 US 87 (1983).
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Chapter 11
Chapter 11 from Advanced Business Law and the Legal Environment was adapted
by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0
license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://creativecommons.org/licenses/by-sa/3.0/
http://www.saylor.org/site/textbooks/Advanced%20Business%20Law%20and%20the%20Legal%20Environment
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Products Liability
L E A R N I N G O B J E C T I V E S
After reading this chapter, you should understand the following:
1. How products-liability law allocates the costs of a consumer society
2. How warranty theory works in products liability, and what its limitations are
3. How negligence theory works, and what its problems are
4. How strict liability theory works, and what its limitations are
5. What efforts are made to reform products-liability law, and why
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11.1 Introduction: Why Products-Liability Law Is
Important
L E A R N I N G O B J E C T I V E S
1. Understand why products-liability law underwent a revolution in the
twentieth century.
2. Recognize that courts play a vital role in policing the free enterprise system by
adjudicating how the true costs of modern consumer culture are allocated.
3. Know the names of the modern causes of action for products-liability cases.
In previous chapters, we discussed remedies generally. In this chapter, we focus specifically on remedies
available when a defective product causes personal injury or other damages. Products liability describes a
type of claim, not a separate theory of liability. Products liability has strong emotional overtones—ranging
from the prolitigation position of consumer advocates to the conservative perspective of the
manufacturers.
History of Products-Liability Law
The theory of caveat emptor—let the buyer beware—that pretty much governed consumer law from the
early eighteenth century until the early twentieth century made some sense. A horse-drawn buggy is a
fairly simple device: its workings are apparent; a person of average experience in the 1870s would know
whether it was constructed well and made of the proper woods. Most foodstuffs 150 years ago were grown
at home and “put up” in the home kitchen or bought in bulk from a local grocer, subject to inspection and
sampling; people made home remedies for coughs and colds and made many of their own clothes. Houses
and furnishings were built of wood, stone, glass, and plaster—familiar substances. Entertainment was a
book or a piano. The state of technology was such that the things consumed were, for the most part,
comprehensible and—very important—mostly locally made, which meant that the consumer who suffered
damages from a defective product could confront the product’s maker directly. Local reputation is a
powerful influence on behavior.
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The free enterprise system confers great benefits, and no one can deny that: materialistically, compare the
image sketched in the previous paragraph with circumstances today. But those benefits come with a cost,
and the fundamental political issue always is who has to pay. Consider the following famous passage from
Upton Sinclair’s great novel The Jungle. It appeared in 1906. He wrote it to inspire labor reform; to his
dismay, the public outrage focused instead on consumer protection reform. Here is his description of the
sausage-making process in a big Chicago meatpacking plant:
There was never the least attention paid to what was cut up for sausage; there would come all the way
back from Europe old sausage that had been rejected, and that was moldy and white—it would be dosed
with borax and glycerin, and dumped into the hoppers, and made over again for home consumption.
There would be meat that had tumbled out on the floor, in the dirt and sawdust, where the workers had
tramped and spit uncounted billions of consumption germs. There would be meat stored in great piles in
rooms; and the water from leaky roofs would drip over it, and thousands of rats would race about on it. It
was too dark in these storage places to see well, but a man could run his hand over these piles of meat and
sweep off handfuls of the dried dung of rats. These rats were nuisances, and the packers would put
poisoned bread out for them; they would die, and then rats, bread, and meat would go into the hoppers
together. This is no fairy story and no joke; the meat would be shoveled into carts, and the man who did
the shoveling would not trouble to lift out a rat even when he saw one—there were things that went into
the sausage in comparison with which a poisoned rat was a tidbit. There was no place for the men to wash
their hands before they ate their dinner, and so they made a practice of washing them in the water that
was to be ladled into the sausage. There were the butt-ends of smoked meat, and the scraps of corned
beef, and all the odds and ends of the waste of the plants, that would be dumped into old barrels in the
cellar and left there.
Under the system of rigid economy which the packers enforced, there were some jobs that it only paid to
do once in a long time, and among these was the cleaning out of the waste barrels. Every spring they did
it; and in the barrels would be dirt and rust and old nails and stale water—and cartload after cartload of it
would be taken up and dumped into the hoppers with fresh meat, and sent out to the public’s breakfast.
Some of it they would make into “smoked” sausage—but as the smoking took time, and was therefore
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expensive, they would call upon their chemistry department, and preserve it with borax and color it with
gelatin to make it brown. All of their sausage came out of the same bowl, but when they came to wrap it
they would stamp some of it “special,” and for this they would charge two cents more a pound. [1]
It became clear from Sinclair’s exposé that associated with the marvels of then-modern meatpacking and
distribution methods was food poisoning: a true cost became apparent. When the true cost of some
money-making enterprise (e.g., cigarettes) becomes inescapably apparent, there are two possibilities.
First, the legislature can in some way mandate that the manufacturer itself pay the cost; with the
meatpacking plants, that would be the imposition of sanitary food-processing standards. Typically,
Congress creates an administrative agency and gives the agency some marching orders, and then the
agency crafts regulations dictating as many industry-wide reform measures as are politically possible.
Second, the people who incur damages from the product (1) suffer and die or (2) access the machinery of
the legal system and sue the manufacturer. If plaintiffs win enough lawsuits, the manufacturer’s insurance
company raises rates, forcing reform (as with high-powered muscle cars in the 1970s); the business goes
bankrupt; or the legislature is pressured to act, either for the consumer or for the manufacturer.
If the industry has enough clout to blunt—by various means—a robust proconsumer legislative response
so that government regulation is too lax to prevent harm, recourse is had through the legal system. Thus
for all the talk about the need for tort reform (discussed later in this chapter), the courts play a vital role in
policing the free enterprise system by adjudicating how the true costs of modern consumer culture are
allocated.
Obviously the situation has improved enormously in a century, but one does not have to look very far to
find terrible problems today. Consider the following, which occurred in 2009–10:
In the United States, Toyota recalled 412,000 passenger cars, mostly the Avalon model, for
steering problems that reportedly led to three accidents.
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Portable baby recliners that are supposed to help fussy babies sleep better were recalled after the
death of an infant: the Consumer Product Safety Commission announced the recall of 30,000
Nap Nanny recliners made by Baby Matters of Berwyn, Pennsylvania.
More than 70,000 children and teens go to the emergency room each year for injuries and
complications from medical devices. Contact lenses are the leading culprit, the first detailed
national estimate suggests.
Smith and Noble recalled 1.3 million Roman shades and roller shades after a child was nearly
strangled: the Consumer Product Safety Commission says a five-year-old boy in Tacoma,
Washington, was entangled in the cord of a roller shade in May 2009. [2]
The Consumer Product Safety Commission reported that 4,521 people were killed in the United
States in consumer-product-related incidences in 2009, and millions of people visited hospital
emergency rooms from consumer-product-related injuries. [3]
Reports about the possibility that cell-phone use causes brain cancer continue to be hotly
debated. Critics suggest that the studies minimizing the risk were paid for by cell-phone
manufacturers. [4]
Products liability can also be a life-or-death matter from the manufacturer’s perspective. In 2009,
Bloomberg BusinessWeek reported that the costs of product safety for manufacturing firms can be
enormous: “Peanut Corp., based in Lynchberg, Va., has been driven into bankruptcy since health officials
linked tainted peanuts to more than 600 illnesses and nine deaths. Mattel said the first of several toy
recalls it announced in 2007 cut its quarterly operating income by $30 million. Earlier this decade, Ford
Motor spent roughly $3 billion replacing 10.6 million potentially defective Firestone tires.” [5]Businesses
complain, with good reason, about the expenses associated with products-liability problems.
Current State of the Law
Although the debate has been heated and at times simplistic, the problem of products liability is complex
and most of us regard it with a high degree of ambivalence. We are all consumers, after all, who profit
greatly from living in an industrial society. In this chapter, we examine the legal theories that underlie
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products-liability cases that developed rapidly in the twentieth century to address the problems of
product-caused damages and injuries in an industrial society.
In the typical products-liability case, three legal theories are asserted—a contract theory and two tort
theories. The contract theory is warranty, governed by the UCC, and the two tort theories are
negligence and strict products liability, governed by the common law. See .
Figure 11.1 Major Products Liability Theories
K E Y T A K E A W A Y
As products became increasingly sophisticated and potentially dangerous in the
twentieth century, and as the separation between production and consumption
widened, products liability became a very important issue for both consumers and
manufacturers. Millions of people every year are adversely affected by defective
products, and manufacturers and sellers pay huge amounts for products-liability
insurance and damages. The law has responded with causes of action that provide
a means for recovery for products-liability damages.
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E X E R C I S E S
1. How does the separation of production from consumption affect products-
liability issues?
2. What other changes in production and consumption have caused the need for
the development of products-liability law?
3. How can it be said that courts adjudicate the allocation of the costs of a
consumer-oriented economy?
[1] Upton Sinclair, The Jungle (New York: Signet Classic, 1963), 136.
[2] FindLaw, AP reports, http://news.findlaw.com/legalnews/us/pl.
[3] US Consumer Product Safety Commission, 2009 Report to the President and the Congress,
accessed March 1, 2011,http://www.cpsc.gov/cpscpub/pubs/reports/2009rpt .
[4] Matt Hamblen, “New Study Warns of Cell Phone Dangers,”Computerworld US, August 9,
2009, accessed March 1, 2011,http://news.techworld.com/personal-tech/3200539/new-study-
warns-of-cell-phone-dangers.
[5] Michael Orey, “Taking on Toy Safety,” BusinessWeek, March 6, 2009, accessed March 1,
2011,http://www.businessweek.com/managing/content/mar2009/ca2009036_271002.htm.
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11.2 Warranties
L E A R N I N G O B J E C T I V E S
1. Recognize a UCC express warranty and how it is created.
2. Understand what is meant under the UCC by implied warranties, and know the main
types of implied warranties: merchantability, fitness for a particular purpose, and
title.
3. Know that there are other warranties: against infringement and as may arise from
usage of the trade.
4. See that there are difficulties with warranty theory as a cause of action for products
liability; a federal law has addressed some of these.
The UCC governs express warranties and various implied warranties, and for many years it was the only
statutory control on the use and meanings of warranties. In 1975, after years of debate, Congress passed
and President Gerald Ford signed into law the Magnuson-Moss Act, which imposes certain requirements
on manufacturers and others who warrant their goods. We will examine both the UCC and the Magnuson-
Moss Act.
Types of Warranties
Express Warranties
An express warranty is created whenever the seller affirms that the product will perform in a certain
manner. Formal words such as “warrant” or “guarantee” are not necessary. A seller may create an express
warranty as part of the basis for the bargain of sale by means of (1) an affirmation of a fact or promise
relating to the goods, (2) a description of the goods, or (3) a sample or model. Any of these will create an
express warranty that the goods will conform to the fact, promise, description, sample, or model. Thus a
seller who states that “the use of rustproof linings in the cans would prevent discoloration and
adulteration of the Perform solution” has given an express warranty, whether he realized it or
not. [1] Claims of breach of express warranty are, at base, claims of misrepresentation.
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But the courts will not hold a manufacturer to every statement that could conceivably be interpreted to be
an express
warranty.
Manufacturers and sellers constantly “puff” their products, and the law is content to
let them inhabit that gray area without having to make good on every claim. UCC 2-313(2) says that “an
affirmation merely of the value of the goods or a statement purporting to be merely the seller’s opinion or
commendation of the goods does not create a warranty.” Facts do.
It is not always easy, however, to determine the line between an express warranty and a piece of puffery. A
salesperson who says that a strawberry huller is “great” has probably puffed, not warranted, when it turns
out that strawberries run through the huller look like victims of a massacre. But consider the classic cases
of the defective used car and the faulty bull. In the former, the salesperson said the car was in “A-1 shape”
and “mechanically perfect.” In the latter, the seller said not only that the bull calf would “put the buyer on
the map” but that “his father was the greatest living dairy bull.” The car, carrying the buyer’s seven-
month-old child, broke down while the buyer was en route to visit her husband in the army during World
War II. The court said that the salesperson had made an express warranty. [2] The bull calf turned out to be
sterile, putting the farmer on the judicial rather than the dairy map. The court said the seller’s spiel was
trade talk, not a warranty that the bull would impregnate cows. [3]
Is there any qualitative difference between these decisions, other than the quarter century that separates
them and the different courts that rendered them? Perhaps the most that can be said is that the more
specific and measurable the statement’s standards, the more likely it is that a court will hold the seller to a
warranty, and that a written statement is easier to construe as a warranty than an oral one. It is also
possible that courts look, if only subliminally, at how reasonable the buyer was in relying on the
statement, although this ought not to be a strict test. A buyer may be unreasonable in expecting a car to
get 100 miles to the gallon, but if that is what the seller promised, that ought to be an enforceable
warranty.
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The CISG (Article 35) provides, “The seller must deliver goods which are of the quantity,
quality and description required by the contract and which are contained or packaged in
the manner required by the contract. [And the] goods must possess the qualities of goods
which the seller has held out to the buyer as a sample or model.”
Implied Warranties
Express warranties are those over which the parties dickered—or could have. Express warranties go to the
essence of the bargain. An implied warranty, by contrast, is one that circumstances alone, not specific
language, compel reading into the sale. In short, an implied warranty is one created by law, acting from an
impulse of common sense.
Implied Warranty of Merchantability
Section 2-314 of the UCC lays down the fundamental rule that goods carry
an implied warranty of merchantability if sold by a merchant-seller. What is merchantability? Section 2-
314(2) of the UCC says that merchantable goods are those that conform at least to the following six
characteristics:
1. Pass without objection in the trade under the contract description
2. In the case of fungible goods, are of fair average quality within the description
3. Are fit for the ordinary purposes for which such goods are used
4. Run, within the variations permitted by the agreement, of even kind, quality, and quantity within
each unit and among all units involved
5. Are adequately contained, packaged, and labeled as the agreement may require
6. Conform to the promise or affirmations of fact made on the container or label if any
For the purposes of Section 2-314(2)(c) of the UCC, selling and serving food or drink for consumption on
or off the premises is a sale subject to the implied warranty of merchantability—the food must be “fit for
the ordinary purposes” to which it is put. The problem is common: you bite into a cherry pit in the cherry-
vanilla ice cream, or you choke on the clam shells in the chowder. Is such food fit for the ordinary
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purposes to which it is put? There are two schools of thought. One asks whether the food was natural as
prepared. This view adopts the seller’s perspective. The other asks what the consumer’s reasonable
expectation was.
The first test is sometimes said to be the “natural-foreign” test. If the substance in the soup is natural to
the substance—as bones are to fish—then the food is fit for consumption. The second test, relying on
reasonable expectations, tends to be the more commonly used test.
The Convention provides (Article 35) that “unless otherwise agreed, the goods sold are fit
for the purposes for which goods of the same description would ordinarily be used.”
Fitness for a Particular Purpose
Section 2-315 of the UCC creates another implied warranty. Whenever a seller, at the time she contracts to
make a sale, knows or has reason to know that the buyer is relying on the seller’s skill or judgment to
select a product that is suitable for the particular purpose the buyer has in mind for the goods to be sold,
there is an implied warranty that the goods are fit for that purpose. For example, you go to a hardware
store and tell the salesclerk that you need a paint that will dry overnight because you are painting your
front door and a rainstorm is predicted for the next day. The clerk gives you a slow-drying oil-based paint
that takes two days to dry. The store has breached an
implied warranty of fitness for particular purpose.
Note the distinction between “particular” and “ordinary” purposes. Paint is made to color and when dry to
protect a surface. That is its ordinary purpose, and had you said only that you wished to buy paint, no
implied warranty of fitness would have been breached. It is only because you had a particular purpose in
mind that the implied warranty arose. Suppose you had found a can of paint in a general store and told
the same tale, but the proprietor had said, “I don’t know enough about that paint to tell you anything
beyond what’s on the label; help yourself.” Not every seller has the requisite degree of skill and knowledge
about every product he sells to give rise to an implied warranty. Ultimately, each case turns on its
particular circumstances:“The Convention provides (Article 35): [The goods must be] fit for
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any particular purpose expressly or impliedly made known to the seller at the time of the
conclusion of the contract, except where the circumstances show that the buyer did not
rely, or that it was unreasonable for him to rely, on the seller’s skill and judgment.”
Other Warranties
Article 2 contains other warranty provisions, though these are not related specifically to products liability.
Thus, under UCC, Section 2-312, unless explicitly excluded, the seller warrants he is conveyinggood
title that is rightfully his and that the goods are transferred free of any security interest or other lien or
encumbrance. In some cases (e.g., a police auction of bicycles picked up around campus and never
claimed), the buyer should know that the seller does not claim title in himself, nor that title will
necessarily be good against a third party, and so subsection (2) excludes warranties in these
circumstances. But the circumstances must be so obvious that no reasonable person would suppose
otherwise.
In Menzel v. List, an art gallery sold a painting by Marc Chagall that it purchased in Paris. [4] The painting
had been stolen by the Germans when the original owner was forced to flee Belgium in the 1930s. Now in
the United States, the original owner discovered that a new owner had the painting and successfully sued
for its return. The customer then sued the gallery, claiming that it had breached the implied warranty of
title when it sold the painting. The court agreed and awarded damages equal to the appreciated value of
the painting. A good-faith purchaser who must surrender stolen goods to their true owner has a claim for
breach of the implied warranty of title against the person from whom he bought the goods.
A second implied warranty, related to title, is that the merchant-seller warrants the goods are free of any
rightful claim by a third personthat the seller has infringed his rights (e.g., that a gallery has not infringed
a copyright by selling a reproduction). This provision only applies to a seller who regularly deals in goods
of the kind in question. If you find an old print in your grandmother’s attic, you do not warrant when you
sell it to a neighbor that it is free of any valid infringement claims.
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A third implied warranty in this context involves the course of dealing or usage of trade. Section 2-314(3)
of the UCC says that unless modified or excluded implied warranties may arise from a course of dealing or
usage of trade. If a certain way of doing business is understood, it is not necessary for the seller to state
explicitly that he will abide by the custom; it will be implied. A typical example is the obligation of a dog
dealer to provide pedigree papers to prove the dog’s lineage conforms to the contract.
Problems with Warranty Theory
In General
It may seem that a person asserting a claim for breach of warranty will have a good chance of success
under an express warranty or implied warranty theory of merchantability or fitness for a particular
purpose. In practice, though, claimants are in many cases denied recovery. Here are four general
problems:
The claimant must prove that there was a sale.
The sale was of goods rather than real estate or services.
The action must be brought within the four-year statute of limitations under Article 2-725, when
the tender of delivery is made, not when the plaintiff discovers the defect.
Under UCC, Section 2-607(3)(a) and Section 2A-516(3)(a), which covers leases, the claimant who
fails to give notice of breach within a reasonable time of having accepted the goods will see the
suit dismissed, and few consumers know enough to do so, except when making a complaint about
a purchase of spoiled milk or about paint that wouldn’t dry.
In addition to these general problems, the claimant faces additional difficulties stemming directly from
warranty theory, which we take up later in this chapter.
Exclusion or Modification of Warranties
The UCC permits sellers to exclude or disclaim warranties in whole or in part. That’s reasonable, given
that the discussion here is about contract, and parties are free to make such contracts as they see fit. But a
number of difficulties can arise.
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Exclusion of Express Warranties
The simplest way for the seller to exclude express warranties is not to give them. To be sure, Section 2-
316(1) of the UCC forbids courts from giving operation to words in fine print that negate or limit express
warranties if doing so would unreasonably conflict with express warranties stated in the main body of the
contract—as, for example, would a blanket statement that “this contract excludes all warranties express or
implied.” The purpose of the UCC provision is to prevent customers from being surprised by unbargained-
for language.
Exclusion of Implied Warranties in General
Implied warranties can be excluded easily enough also, by describing the product with language such as
“as is” or “with all faults.” Nor is exclusion simply a function of what the seller says. The buyer who has
either examined or refused to examine the goods before entering into the contract may not assert an
implied warranty concerning defects an inspection would have revealed.
The Convention provides a similar rule regarding a buyer’s rights when he has failed to
inspect the goods (Article 35): “The seller is not liable…for any lack of conformity of the
goods if at the time of the conclusion of the contract the buyer knew or could not have been
unaware of such lack of conformity.”
Implied Warranty of Merchantability
Section 2-316(2) of the UCC permits the seller to disclaim or modify the implied warranty of
merchantability, as long as the statement actually mentions “merchantability” and, if it is written, is
“conspicuous.” Note that the disclaimer need not be in writing, and—again—all implied warranties can be
excluded as noted.
Implied Warranty of Fitness
Section 2-316(2) of the UCC permits the seller also to disclaim or modify an implied warranty of fitness.
This disclaimer or modification must be in writing, however, and must be conspicuous. It need not
mention fitness explicitly; general language will do. The following sentence, for example, is sufficient to
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exclude all implied warranties of fitness: “There are no warranties that extend beyond the description on
the face of this contract.”
Here is a standard disclaimer clause found in a Dow Chemical Company agreement: “Seller warrants that
the goods supplied here shall conform to the description stated on the front side hereof, that it will convey
good title, and that such goods shall be delivered free from any lawful security interest, lien, or
encumbrance. SELLER MAKES NO WARRANTY OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR USE. NOR IS THERE ANY OTHER EXPRESS OR IMPLIED WARRANTY.”
Conflict between Express and Implied Warranties
Express and implied warranties and their exclusion or limitation can often conflict. Section 2-317 of the
UCC provides certain rules for deciding which should prevail. In general, all warranties are to be
construed as consistent with each other and as cumulative. When that assumption is unreasonable, the
parties’ intention governs the interpretation, according to the following rules: (a) exact or technical
specifications displace an inconsistent sample or model or general language of description; (b) a sample
from an existing bulk displaces inconsistent general language of description; (c) express warranties
displace inconsistent implied warranties other than an implied warranty of fitness for a particular
purpose. Any inconsistency among warranties must always be resolved in favor of the implied warranty of
fitness for a particular purpose. This doesn’t mean that warranty cannot be limited or excluded altogether.
The parties may do so. But in cases of doubt whether it or some other language applies, the implied
warranty of fitness will have a superior claim.
The Magnuson-Moss Act and Phantom Warranties
After years of debate over extending federal law to regulate warranties, Congress enacted the Magnuson-
Moss Federal Trade Commission Warranty Improvement Act (more commonly referred to as the
Magnuson-Moss Act) and President Ford signed it in 1975. The act was designed to clear up confusing and
misleading warranties, where—as Senator Magnuson put it in introducing the bill—“purchasers of
consumer products discover that their warranty may cover a 25-cent part but not the $100 labor charge or
that there is full coverage on a piano so long as it is shipped at the purchaser’s expense to the
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factory.…There is a growing need to generate consumer understanding by clearly and conspicuously
disclosing the terms and conditions of the warranty and by telling the consumer what to do if his
guaranteed product becomes defective or malfunctions.” The Magnuson-Moss Act only applies to
consumer products (for household and domestic uses); commercial purchasers are presumed to be
knowledgeable enough not to need these protections, to be able to hire lawyers, and to be able to include
the cost of product failures into the prices they charge.
The act has several provisions to meet these consumer concerns; it regulates the content of warranties and
the means of disclosing those contents. The act gives the Federal Trade Commission (FTC) the authority
to promulgate detailed regulations to interpret and enforce it. Under FTC regulations, any written
warranty for a product costing a consumer more than ten dollars must disclose in a single document and
in readily understandable language the following nine items of information:
1. The identity of the persons covered by the warranty, whether it is limited to the original purchaser
or fewer than all who might come to own it during the warranty period.
2. A clear description of the products, parts, characteristics, components, or properties covered, and
where necessary for clarity, a description of what is excluded.
3. A statement of what the warrantor will do if the product fails to conform to the warranty,
including items or services the warranty will pay for and, if necessary for clarity, what it will not
pay for.
4. A statement of when the warranty period starts and when it expires.
5. A step-by-step explanation of what the consumer must do to realize on the warranty, including
the names and addresses of those to whom the product must be brought.
6. Instructions on how the consumer can be availed of any informal dispute resolution mechanism
established by the warranty.
7. Any limitations on the duration of implied warranties—since some states do not permit such
limitations, the warranty must contain a statement that any limitations may not apply to the
particular consumer.
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8. Any limitations or exclusions on relief, such as consequential damages—as above, the warranty
must explain that some states do not allow such limitations.
9. The following statement: “This warranty gives you specific legal rights, and you may also have
other rights which vary from state to state.”
In addition to these requirements, the act requires that the warranty be labeled either a full or limited
warranty. A full warranty means (1) the defective product or part will be fixed or replaced for free,
including removal and reinstallation; (2) it will be fixed within a reasonable time; (3) the consumer need
not do anything unreasonable (like shipping the piano to the factory) to get warranty service; (4) the
warranty is good for anyone who owns the product during the period of the warranty; (5) the consumer
gets money back or a new product if the item cannot be fixed within a reasonable number of attempts. But
the full warranty may not cover the whole product: it may cover only the hard drive in the computer, for
example; it must state what parts are included and excluded. A limited warranty is less inclusive. It
may cover only parts, not labor; it may require the consumer to bring the product to the store for service;
it may impose a handling charge; it may cover only the first purchaser. Both full and limited warranties
may exclude consequential
damages.
Disclosure of the warranty provisions prior to sale is required by FTC regulations; this can be done in a
number of ways. The text of the warranty can be attached to the product or placed in close conjunction to
it. It can be maintained in a binder kept in each department or otherwise easily accessible to the
consumer. Either the binders must be in plain sight or signs must be posted to call the prospective buyer’s
attention to them. A notice containing the text of the warranty can be posted, or the warranty itself can be
printed on the product’s package or container.
Phantom warranties are addressed by the Magnuson-Moss Act. As we have seen, the UCC permits the
seller to disclaim implied warranties. This authority often led sellers to give what were called phantom
warranties—that is, the express warranty contained disclaimers of implied warranties, thus leaving the
consumer with fewer rights than if no express warranty had been given at all. In the words of the
legislative report of the act, “The bold print giveth, and the fine print taketh away.” The act abolished
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these phantom warranties by providing that if the seller gives a written warranty, whether express or
implied, he cannot disclaim or modify implied warranties. However, a seller who gives a limited warranty
can limit implied warranties to the duration of the limited warranty, if the duration is reasonable.
A seller’s ability to disclaim implied warranties is also limited by state law in two ways. First, by
amendment to the UCC or by separate legislation, some states prohibit disclaimers whenever consumer
products are sold. [5] Second, the UCC at 2-302 provides that unconscionable contracts or clauses will not
be enforced. UCC 2-719(3) provides that limitation of damages for personal injury in the sale of
“consumer goods is prima facie unconscionable, but limitation of damages where the loss is commercial is
not.” (Unconscionability was discussed in (Reference mayer_1.0-ch12 not found in Book).)
A first problem with warranty theory, then, is that it’s possible to disclaim or limit the warranty. The worst
abuses of manipulative and tricky warranties are eliminated by the Magnuson-Moss Act, but there are
several other reasons that warranty theory is not the panacea for claimants who have suffered damages or
injuries as a result of defective products.
Privity
A second problem with warranty law (after exclusion and modification of warranties) is that of privity.
Privity is the legal term for the direct connection between the seller and buyer, the two contracting parties.
For decades, the doctrine of privity has held that one person can sue another only if they are in privity.
That worked well in the days when most commerce was local and the connection between seller and buyer
was immediate. But in a modern industrial (or postindustrial) economy, the product is transported
through a much larger distribution system, as depicted in Figure 11.2 “Chain of Distribution”. Two
questions arise: (1) Is the manufacturer or wholesaler (as opposed to the retailer) liable to the buyer under
warranty theory? and (2) May the buyer’s family or friends assert warranty rights?
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Figure 11.2 Chain of Distribution
Horizontal Privity
Suppose Carl Consumer buys a new lamp for his family’s living room. The lamp is defective: Carl gets a
serious electrical shock when he turns it on. Certainly Carl would be covered by the implied warranty of
merchantability: he’s in direct privity with the seller. But what if Carl’s spouse Carlene is injured? She
didn’t buy the lamp; is she covered? Or suppose Carl’s friend David, visiting for an afternoon, gets zapped.
Is David covered? This gets to horizontal privity, noncontracting parties who suffer damages from
defective goods, such as nonbuyer users, consumers, and bystanders. Horizontal privity determines to
whose benefit the warranty “flows”—who can sue for its breach. In one of its rare instances of
nonuniformity, the UCC does not dictate the result. It gives the states three choices, labeled in Section 2-
318 as Alternatives A, B, and C.
Alternative A says that a seller’s warranty extends “to any natural person who is in the family or
household of his buyer or who is a guest in his home” provided (1) it is reasonable to expect the person
suffering damages to use, consume, or be affected by the goods and (2) the warranty extends only to
damages for personal injury.
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Alternative B “extends to any natural person who may reasonably be expected to use, consume, or be
affected by the goods, and who is injured in person by breach of the warranty.” It is less restrictive than
the first alternative: it extends protection to people beyond those in the buyer’s home. For example, what
if Carl took the lamp to a neighbor’s house to illuminate a poker table: under Alternative B, anybody at the
neighbor’s house who suffered injury would be covered by the warranty. But this alternative does not
extend protection to organizations; “natural person” means a human being.
Alternative C is the same as B except that it applies not only to any “natural person” but “to any person
who is injured by breach of the warranty.” This is the most far-reaching alternative because it provides
redress for damage to property as well as for personal injury, and it extends protection to corporations
and other institutional buyers.
One may incidentally note that having three different alternatives for when third-party nonpurchasers can
sue a seller or manufacturer for breach of warranty gives rise to unintended consequences. First, different
outcomes are produced among jurisdictions, including variations in the common law. Second, the great
purpose of the Uniform Commercial Code in promoting national uniformity is undermined. Third, battles
over choice of law—where to file the lawsuit—are generated.
, Section 2A-216, provides basically the same alternatives as applicable to the leasing of goods.
Vertical Privity
The traditional rule was that remote selling parties were not liable: lack of privity was a defense by the
manufacturer or wholesaler to a suit by a buyer with whom these entities did not themselves contract. The
buyer could recover damages from the retailer but not from the original manufacturer, who after all made
the product and who might be much more financially able to honor the warranty. The UCC takes no
position here, but over the last fifty years the judicial trend has been to abolish
this vertical privity requirement. (See Figure 11.2 “Chain of Distribution”; the entities in the
distribution chain are those in vertical privity to the buyer.) It began in 1958, when the Michigan Supreme
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Court overturned the old theory in an opinion written by Justice John D. Voelker (who also wrote the
novel Anatomy of a Murder, under the pen name Robert Traver). [6]
Contributory Negligence, Comparative Negligence, and Assumption of Risk
After disclaimers and privity issues are resolved, other possible impediments facing the plaintiff in a
products-liability warranty case are issues of assumption of the risk, contributory negligence, and
comparative negligence (discussed in Chapter 7 “Introduction to Tort Law” on torts).
Courts uniformly hold that assumption of risk is a defense for sellers against a claim of breach of
warranty, while there is a split of authority over whether comparative and contributory negligence are
defenses. However, the courts’ use of this terminology is often conflicting and confusing. The ultimate
question is really one of causation: was the seller’s breach of the warranty the cause of the plaintiff’s
damages?
The UCC is not markedly helpful in clearing away the confusion caused by years of discussion of
assumption of risk and contributory negligence. Section 2-715(2)(b) of the UCC says that among the forms
of consequential damage for which recovery can be sought is “injury to person or
property proximately resulting from any breach of warranty” (emphasis added). But “proximately” is a
troublesome word. Indeed, ultimately it is a circular word: it means nothing more than that the defendant
must have been a direct enough cause of the damages that the courts will impose liability. Comment 5 to
this section says, “Where the injury involved follows the use of goods without discovery of the defect
causing the damage, the question of ‘proximate’ turns on whether it was reasonable for the buyer to use
the goods without such inspection as would have revealed the defects. If it was not reasonable for him to
do so, or if he did in fact discover the defect prior to his use, the injury would not proximately result from
the breach of warranty.”
Obviously if a sky diver buys a parachute and then discovers a few holes in it, his family would not likely
prevail in court when they sued to recover for his death because the parachute failed to function after he
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jumped at 5,000 feet. But the general notion that it must have been reasonable for a buyer to use goods
without inspection can make a warranty case difficult to prove.
K E Y T A K E A W A Y
A first basis of recovery in products-liability theory is breach of warranty. There are two
types of warranties: express and implied. Under the implied category are three major
subtypes: the implied warranty of merchantability (only given by merchants), the implied
warranty of fitness for a particular purpose, and the implied warranty of title. There are
a number of problems with the use of warranty theory: there must have been a sale of
the goods; the plaintiff must bring the action within the statute of limitations; and the
plaintiff must notify the seller within a reasonable time. The seller may—within the
constraints of the Magnuson-Moss Act—limit or exclude express warranties or limit or
exclude implied warranties. Privity, or lack of it, between buyer and seller has been
significantly eroded as a limitation in warranty theory, but lack of privity may still affect
the plaintiff’s recovery; the plaintiff’s assumption of the risk in using defective goods
may preclude recovery.
1 . E X E R C I S E S
2. What are the two main types of warranties and the important subtypes?
3. Who can make each type of warranty?
4. What general problems does a plaintiff have in bringing a products-liability warranty
case?
5. What problems are presented concerning exclusion or manipulative express
warranties, and how does the Magnuson-Moss Act address them?
6. How are implied warranties excluded?
7. What is the problem of lack of privity, and how does modern law deal with it?
[1] Rhodes Pharmacal Co. v. Continental Can Co., 219 N.E.2d 726 (Ill. 1976).
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[2] Wat Henry Pontiac Co. v. Bradley, 210 P.2d 348 (Okla. 1949).
[3] Frederickson v. Hackney, 198 N.W. 806 (Minn. 1924).
[4] Menzel v. List, 246 N.E.2d 742 (N.Y. 1969).
[5] A number of states have special laws that limit the use of the UCC implied warranty
disclaimer rules in consumer sales. Some of these appear in amendments to the UCC and others
are in separate statutes. The broadest approach is that of the nine states that prohibit the
disclaimer of implied warranties in consumer sales (Massachusetts, Connecticut, Maine,
Vermont, Maryland, the District of Columbia, West Virginia, Kansas, Mississippi, and, with
respect to personal injuries only, Alabama). There is a difference in these states whether the
rules apply to manufacturers as well as retailers.
[6] Spence v. Three Rivers Builders & Masonry Supply, Inc., 90 N.W.2d 873 (Mich. 1958).
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11.3 Negligence
L E A R N I N G O B J E C T I V E S
1. Recognize how the tort theory of negligence may be of use in products-liability
suits.
2. Understand why negligence is often not a satisfactory cause of action in such
suits: proof of it may be difficult, and there are powerful defenses to claims of
negligence.
Negligence is the second theory raised in the typical products-liability case. It is a tort theory (as
compared to breach of warranty, which is of course a contract theory), and it does have this advantage
over warranty theory: privity is never relevant. A pedestrian is struck in an intersection by a car whose
brakes were defectively manufactured. Under no circumstances would breach of warranty be a useful
cause of action for the pedestrian—there is no privity at all. Negligence is considered in detail in the on
torts; it basically means lack of due care.
Typical Negligence Claims: Design Defects and Inadequate Warnings
Negligence theory in products liability is most useful in two types of cases: defective design and defective
warnings.
Design Defects
Manufacturers can be, and often are, held liable for injuries caused by products that were defectively
designed. The question is whether the designer used reasonable care in designing a product reasonably
safe for its foreseeable use. The concern over reasonableness and standards of care are elements of
negligence theory.
Defective-design cases can pose severe problems for manufacturing and safety engineers. More safety
means more cost. Designs altered to improve safety may impair functionality and make the product less
desirable to consumers. At what point safety comes into reasonable balance with performance, cost, and
desirability (see ) is impossible to forecast accurately, though some factors can be taken into account. For
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example, if other manufacturers are marketing comparable products whose design are intrinsically safer,
the less-safe products are likely to lose a test of reasonableness in court.
Figure 11.3 The Reasonable Design Balance
Warning Defects
We noted that a product may be defective if the manufacturer failed to warn the user of potential dangers.
Whether a warning should have been affixed is often a question of what is reasonably foreseeable, and the
failure to affix a warning will be treated as negligence. The manufacturer of a weed killer with poisonous
ingredients is certainly acting negligently when it fails to warn the consumer that the contents are
potentially lethal.
The law governing the necessity to warn and the adequacy of warnings is complex. What is reasonable
turns on the degree to which a product is likely to be misused and, as the disturbing Laaperi case ()
illustrates, whether the hazard is obvious.
Problems with Negligence Theory
Negligence is an ancient cause of action and, as was discussed in the torts chapter, it carries with it a
number of well-developed defenses. Two categories may be mentioned: common-law defenses and
preemption.
Common-Law Defenses against Negligence
Among the problems confronting a plaintiff with a claim of negligence in products-
liability suits (again, these concepts are discussed in the torts chapter) are the following:
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Proving negligence at all: just because a product is defective does not necessarily
prove the manufacturer breached a duty of care.
Proximate cause: even if there was some negligence, the plaintiff must prove her
damages flowed proximately from that negligence.
Contributory and comparative negligence: the plaintiff’s own actions contributed
to the damages.
Subsequent alteration of the product: generally the manufacturer will not be
liable if the product has been changed.
Misuse or abuse of the product: using a lawn mower to trim a hedge or taking too
much of a drug are examples.
Assumption of the risk: knowingly using the product in a risky way.
Preemption
Preemption (or “pre-emption”) is illustrated by this problem: suppose there is a federal standard
concerning the product, and the defendant manufacturer meets it, but the standard is not really very
protective. (It is not uncommon, of course, for federal standard makers of all types to be significantly
influenced by lobbyists for the industries being regulated by the standards.) Is it enough for the
manufacturer to point to its satisfaction of the standard so that such satisfaction preempts (takes over)
any common-law negligence claim? “We built the machine to federal standards: we can’t be liable. Our
compliance with the federal safety standard is an affirmative defense.”
Preemption is typically raised as a defense in suits about (1) cigarettes, (2) FDA-approved medical devices,
(3) motor-boat propellers, (4) pesticides, and (5) motor vehicles. This is a complex area of law. Questions
inevitably arise as to whether there was federal preemption, express or implied. Sometimes courts find
preemption and the consumer loses; sometimes the courts don’t find preemption and the case goes
forward. According to one lawyer who works in this field, there has been “increasing pressure on both the
regulatory and congressional fronts to preempt state laws.” That is, the usual defendants (manufacturers)
push Congress and the regulatory agencies to state explicitly in the law that the federal standards preempt
and defeat state law. [1]
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K E Y T A K E A W A Y
Negligence is a second possible cause of action for products-liability claimants. A
main advantage is that no issues of privity are relevant, but there are often
problems of proof; there are a number of robust common-law defenses, and
federal preemption is a recurring concern for plaintiffs’ lawyers.
E X E R C I S E S
1. What two types of products-liability cases are most often brought under
negligence?
2. How could it be said that merely because a person suffers injury as the result
of a defective product, proof of negligence is not necessarily made?
3. What is “preemption” and how is it used as a sword to defeat products-
liability plaintiffs?
[1] C. Richard Newsome and Andrew F. Knopf, “Federal Preemption: Products Lawyers
Beware,” Florida Justice Association Journal, July 27, 2007, accessed March 1,
2011, http://www.newsomelaw.com/resources/articles/federal-preemption-products-lawyers-
beware.
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11.4 Strict Liability in Tort
L E A R N I N G O B J E C T I V E S
1. Know what “strict products liability” means and how it differs from the other two
products-liability theories.
2. Understand the basic requirements to prove strict products liability.
3. See what obstacles to recovery remain with this doctrine.
The warranties grounded in the Uniform Commercial Code (UCC) are often ineffective in assuring
recovery for a plaintiff’s injuries. The notice requirements and the ability of a seller to disclaim the
warranties remain bothersome problems, as does the privity requirement in those states that continue to
adhere to it.
Negligence as a products-liability theory obviates any privity problems, but negligence comes with a
number of familiar defenses and with the problems of preemption.
To overcome the obstacles, judges have gone beyond the commercial statutes and the ancient concepts of
negligence. They have fashioned a tort theory of products liability based on the principle of strict
products liability. One court expressed the rationale for the development of the concept as follows:
“The rule of strict liability for defective products is an example of necessary paternalism judicially shifting
risk of loss by application of tort doctrine because [the UCC] scheme fails to adequately cover the
situation. Judicial paternalism is to loss shifting what garlic is to a stew—sometimes necessary to give full
flavor to statutory law, always distinctly noticeable in its result, overwhelmingly counterproductive if
excessive, and never an end in itself.” [1] Paternalism or not, strict liability has become a very important
legal theory in products-liability cases.
Strict Liability Defined
The formulation of strict liability that most courts use is Section 402A of the Restatement of Torts
(Second), set out here in full:
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(1) One who sells any product in a defective condition unreasonably dangerous to the user or consumer or
to his property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or
to his
property, if
(a) the seller is engaged in the business of selling such a product, and
(b) it is expected to and does reach the user or consumer without substantial change in the condition in
which it is sold.
(2) This rule applies even though
(a) the seller has exercised all possible care in the preparation and sale of his product, and
(b) the user or consumer has not bought the product from or entered into any contractual relation with
the seller.
Section 402A of the Restatement avoids the warranty booby traps. It states a rule of law not governed by
the UCC, so limitations and exclusions in warranties will not apply to a suit based on the Restatement
theory. And the consumer is under no obligation to give notice to the seller within a reasonable time of
any injuries. Privity is not a requirement; the language of the Restatement says it applies to “the user or
consumer,” but courts have readily found that bystanders in various situations are entitled to bring
actions under Restatement, Section 402A. The formulation of strict liability, though, is limited to physical
harm. Many courts have held that a person who suffers economic loss must resort to warranty law.
Strict liability avoids some negligence traps, too. No proof of negligence is required. See .
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Figure 11.4 Major Difference between Warranty and Strict Liability
Section 402A Elements
Product in a Defective Condition
Sales of goods but not sales of services are covered under the Restatement, Section 402A. Furthermore,
the plaintiff will not prevail if the product was safe for normal handling and consumption when sold. A
glass soda bottle that is properly capped is not in a defective condition merely because it can be broken if
the consumer should happen to drop it, making the jagged glass dangerous. Chocolate candy bars are not
defective merely because you can become ill by eating too many of them at once. On the other hand, a
seller would be liable for a product defectively packaged, so that it could explode or deteriorate and
change its chemical composition. A product can also be in a defective condition if there is danger that
could come from an anticipated wrongful use, such as a drug that is safe only when taken in limited doses.
Under those circumstances, failure to place an adequate dosage warning on the container makes the
product defective.
The plaintiff bears the burden of proving that the product is in a defective condition, and this burden can
be difficult to meet. Many products are the result of complex feats of engineering. Expert witnesses are
necessary to prove that the products were defectively manufactured, and these are not always easy to
come by. This difficulty of proof is one reason why many cases raise the failure to warn as the dispositive
issue, since in the right case that issue is far easier to prove. The Anderson case (detailed in the exercises
at the end of this chapter) demonstrates that the plaintiff cannot prevail under strict liability merely
because he was injured. It is not the fact of injury that is dispositive but the defective condition of the
product.
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Unreasonably Dangerous
The product must be not merely dangerous but unreasonably dangerous. Most products have
characteristics that make them dangerous in certain circumstances. As the Restatement commentators
note, “Good whiskey is not unreasonably dangerous merely because it will make some people drunk, and
is especially dangerous to alcoholics; but bad whiskey, containing a dangerous amount of fuel oil, is
unreasonably dangerous.…Good butter is not unreasonably dangerous merely because, if such be the case,
it deposits cholesterol in the arteries and leads to heart attacks; but bad butter, contaminated with
poisonous fish oil, is unreasonably dangerous.” [2] Under Section 402A, “the article sold must be
dangerous to an extent beyond that which would be contemplated by the ordinary consumer who
purchases it, with the ordinary knowledge common to the community as to its characteristics. ”
Even high risks of danger are not necessarily unreasonable. Some products are unavoidably unsafe; rabies
vaccines, for example, can cause dreadful side effects. But the disease itself, almost always fatal, is worse.
A product is unavoidably unsafe when it cannot be made safe for its intended purpose given the present
state of human knowledge. Because important benefits may flow from the product’s use, its producer or
seller ought not to be held liable for its danger.
However, the failure to warn a potential user of possible hazards can make a product defective under
Restatement, Section 402A, whether unreasonably dangerous or even unavoidably unsafe. The dairy
farmer need not warn those with common allergies to eggs, because it will be presumed that the person
with an allergic reaction to common foodstuffs will be aware of them. But when the product contains an
ingredient that could cause toxic effects in a substantial number of people and its danger is not widely
known (or if known, is not an ingredient that would commonly be supposed to be in the product), the lack
of a warning could make the product unreasonably dangerous within the meaning of Restatement, Section
402A. Many of the suits brought by asbestos workers charged exactly this point; “The utility of an
insulation product containing asbestos may outweigh the known or foreseeable risk to the insulation
workers and thus justify its marketing. The product could still be unreasonably dangerous, however, if
unaccompanied by adequate warnings. An insulation worker, no less than any other product user, has a
right to decide whether to expose himself to the risk.” [3] This rule of law came to haunt the Manville
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Corporation: it was so burdened with lawsuits, brought and likely to be brought for its sale of asbestos—a
known carcinogen—that it declared bankruptcy in 1982 and shucked its liability. [4]
Engaged in the Business of Selling
Restatement, Section 402A(1)(a), limits liability to sellers “engaged in the business of selling such a
product.” The rule is intended to apply to people and entities engaged in business, not to casual one-time
sellers. The business need not be solely in the defective product; a movie theater that sells popcorn with a
razor blade inside is no less liable than a grocery store that does so. But strict liability under this rule does
not attach to a private individual who sells his own automobile. In this sense, Restatement, Section 402A,
is analogous to the UCC’s limitation of the warranty of merchantability to the merchant.
The requirement that the defendant be in the business of selling gets to the rationale for the whole
concept of strict products liability: businesses should shoulder the cost of injuries because they are in the
best position to spread the risk and distribute the expense among the public. This same policy has been
the rationale for holding bailors and lessors liable for defective equipment just as if they had been
sellers.[5]
Reaches the User without Change in Condition
Restatement, Section 402A(1)(b), limits strict liability to those defective products that are expected to and
do reach the user or consumer without substantial change in the condition in which the products are sold.
A product that is safe when delivered cannot subject the seller to liability if it is subsequently mishandled
or changed. The seller, however, must anticipate in appropriate cases that the product will be stored;
faulty packaging or sterilization may be the grounds for liability if the product deteriorates before being
used.
Liability Despite Exercise of All Due Care
Strict liability applies under the Restatement rule even though “the seller has exercised all possible care in
the preparation and sale of his product.” This is the crux of “strict liability” and distinguishes it from the
conventional theory of negligence. It does not matter how reasonably the seller acted or how exemplary is
a manufacturer’s quality control system—what matters is whether the product was defective and the user
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injured as a result. Suppose an automated bottle factory manufactures 1,000 bottles per hour under
exacting standards, with a rigorous and costly quality-control program designed to weed out any bottles
showing even an infinitesimal amount of stress. The plant is “state of the art,” and its computerized
quality-control operation is the best in the world. It regularly detects the one out of every 10,000 bottles
that analysis has shown will be defective. Despite this intense effort, it proves impossible to weed out
every defective bottle; one out of one million, say, will still escape detection. Assume that a bottle, filled
with soda, finds its way into a consumer’s home, explodes when handled, sends glass shards into his eye,
and blinds him. Under negligence, the bottler has no liability; under strict liability, the bottler will be
liable to the consumer.
Liability without Contractual Relation
Under Restatement, Section 402A(2)(b), strict liability applies even though the user has not purchased
the product from the seller nor has the user entered into any contractual relation with the seller. In short,
privity is abolished and the injured user may use the theory of strict liability against manufacturers and
wholesalers as well as retailers. Here, however, the courts have varied in their approaches; the trend has
been to allow bystanders recovery. The Restatement explicitly leaves open the question of the bystander’s
right to recover under strict
liability.
Problems with Strict Liability
Strict liability is liability without proof of negligence and without privity. It would seem that strict liability
is the “holy grail” of products-liability lawyers: the complete answer. Well, no, it’s not the holy grail. It is
certainly true that 402A abolishes the contractual problems of warranty. Restatement, Section 402A,
Comment m, says,
The rule stated in this Section is not governed by the provisions of the Uniform Commercial Code, as to
warranties; and it is not affected by limitations on the scope and content of warranties, or by limitation to
“buyer” and “seller” in those statutes. Nor is the consumer required to give notice to the seller of his injury
within a reasonable time after it occurs, as provided by the Uniform Act. The consumer’s cause of action
does not depend upon the validity of his contract with the person from whom he acquires the product, and
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it is not affected by any disclaimer or other agreement, whether it be between the seller and his immediate
buyer, or attached to and accompanying the product into the consumer’s hands. In short, “warranty” must
be given a new and different meaning if it is used in connection with this Section. It is much simpler to
regard the liability here stated as merely one of strict liability in tort.
Inherent in the Restatement’s language is the obvious point that if the product has been altered, losses
caused by injury are not the manufacturer’s liability. Beyond that there are still some limitations to strict
liability.
Disclaimers
Comment m specifically says the cause of action under Restatement, Section 402A, is not
affected by disclaimer. But in nonconsumer cases, courts have allowed clear and specific
disclaimers. In 1969, the Ninth Circuit observed: “In Kaiser Steel Corp. the [California Supreme
Court] court upheld the dismissal of a strict liability action when the parties, dealing from
positions of relatively equal economic strength, contracted in a commercial setting to limit the
defendant’s liability. The court went on to hold that in this situation the strict liability cause of
action does not apply at all. In reaching this conclusion, the court inKaiser reasoned that strict
liability ‘is designed to encompass situations in which the principles of sales warranties serve
their purpose “fitfully at best.”’ [Citation]” It concluded that in such commercial settings the
UCC principles work well and “to apply the tort doctrines of products liability will displace the
statutory law rather than bring out its full flavor.” [6]
Plaintiff’s Conduct
Conduct by the plaintiff herself may defeat recovery in two circumstances.
Assumption of Risk
Courts have allowed the defense of assumption of the risk in strict products-liability cases. A plaintiff
assumes the risk of injury, thus establishing defense to claim of strict products liability, when he is aware
the product is defective, knows the defect makes the product unreasonably dangerous, has reasonable
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opportunity to elect whether to expose himself to the danger, and nevertheless proceeds to make use of
the product. The rule makes sense.
Misuse or Abuse of the Product
Where the plaintiff does not know a use of the product is dangerous but nevertheless uses for an incorrect
purpose, a defense arises, but only if such misuse was not foreseeable. If it was, the manufacturer should
warn against that misuse. In Eastman v. Stanley Works, a carpenter used a framing hammer to drive
masonry nails; the claw of the hammer broke off, striking him in the eye. [7] He sued. The court held that
while a defense does exist “where the product is used in a capacity which is unforeseeable by the
manufacturer and completely incompatible with the product’s design…misuse of a product suggests a use
which was unanticipated or unexpected by the product manufacturer, or unforeseeable and unanticipated
[but] it was not the case that reasonable minds could only conclude that appellee misused the [hammer].
Though the plaintiff’s use of the hammer might have been unreasonable, unreasonable use is not a
defense to a strict product-liability action or to a negligence action.”
Limited Remedy
The Restatement says recovery under strict liability is limited to “physical harm thereby caused to the
ultimate user or consumer, or to his property,” but not other losses and not economic losses. In Atlas Air
v. General Electric, a New York court held that the “economic loss rule” (no recovery for economic losses)
barred strict products-liability and negligence claims by the purchaser of a used airplane against the
airplane engine manufacturer for damage to the plane caused by an emergency landing necessitated by
engine failure, where the purchaser merely alleged economic losses with respect to the plane itself, and
not damages for personal injury (recovery for damage to the engine was allowed). [8]
But there are exceptions. In Duffin v. Idaho Crop Imp. Ass’n, the court recognized that a party generally
owes no duty to exercise due care to avoid purely economic loss, but if there is a “special relationship”
between the parties such that it would be equitable to impose such a duty, the duty will be imposed. [9] “In
other words, there is an extremely limited group of cases where the law of negligence extends its
protections to a party’s economic interest.”
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The Third Restatement
The law develops. What seemed fitting in 1964 when the Restatement (Second) announced the state of the
common-law rules for strict liability in Section 402A seemed, by 1997, not to be tracking common law
entirely closely. The American Law Institute came out with the Restatement (Third) in that year. The
Restatement changes some things. Most notably it abolishes the “unreasonably dangerous” test and
substitutes a “risk-utility test.” That is, a product is not defective unless its riskiness outweighs its utility.
More important, the Restatement (Third), Section 2, now requires the plaintiff to provide a reasonable
alternative design to the product in question. In advancing a reasonable alternative design, the plaintiff is
not required to offer a prototype product. The plaintiff must only show that the proposed alternative
design exists and is superior to the product in question. The Restatement (Third) also makes it more
difficult for plaintiffs to sue drug companies successfully. One legal scholar commented as follows on the
Restatement (Third):
The provisions of the Third Restatement, if implemented by the courts, will establish a degree of fairness
in the products liability arena. If courts adopt the Third Restatement’s elimination of the “consumer
expectations test,” this change alone will strip juries of the ability to render decisions based on potentially
subjective, capricious and unscientific opinions that a particular product design is unduly dangerous
based on its performance in a single incident. More important, plaintiffs will be required to propose a
reasonable alternative design to the product in question. Such a requirement will force plaintiffs to prove
that a better product design exists other than in the unproven and untested domain of their experts’
imaginations.[10]
Of course some people put more faith in juries than is evident here. The new Restatement has been
adopted by a few jurisdictions and some cases the adopting jurisdictions incorporate some of its ideas, but
courts appear reluctant to abandon familiar precedent.
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K E Y T A K E A W A Y
Because the doctrines of breach of warranty and negligence did not provide adequate
relief to those suffering damages or injuries in products-liability cases, beginning in the
1960s courts developed a new tort theory: strict products liability, restated in the
Second Restatement, section 402A. Basically the doctrine says that if goods sold are
unreasonably dangerous or defective, the merchant-seller will be liable for the
immediate property loss and personal injuries caused thereby. But there remain
obstacles to recovery even under this expanded concept of liability: disclaimers of
liability have not completely been dismissed, the plaintiff’s conduct or changes to the
goods may limit recovery, and—with some exceptions—the remedies available are
limited to personal injury (and damage to the goods themselves); economic loss is not
recoverable. Almost forty years of experience with the Second Restatement’s section on
strict liability has seen changes in the law, and the Third Restatement introduces those,
but it has not been widely accepted yet.
E X E R C I S E S
1. What was perceived to be inadequate about warranty and negligence theories that
necessitated the development of strict liability?
2. Briefly describe the doctrine.
3. What defects in goods render their sellers strictly liable?
4. Who counts as a liable seller?
5. What obstacles does a plaintiff have to overcome here, and what limitations are
there to recovery?
[1] Kaiser Steel Corp. v. Westinghouse Electric Corp., 127 Cal. Rptr. 838 (Cal. 1976).
[2] Restatement (Second) of Contracts, Section 402A(i).
[3] Borel v. Fibreboard Paper Products Corp., 493 F.Zd 1076 (5th Cir. 1973).
[4] In re Johns-Manville Corp., 36 R.R. 727 (So. Dist. N.Y. 1984).
[5] Martin v. Ryder Rental, Inc., 353 A.2d 581 (Del. 1976).
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[6] Idaho Power Co. v. Westinghouse Electric Corp., 596 F.2d 924, 9CA (1979).
[7] Eastman v. Stanley Works, 907 N.E.2d 768 (Ohio App. 2009).
[8] Atlas Air v. General Electric, 16 A.D.3d 444 (N.Y.A.D. 2005).
[9] Duffin v. Idaho Crop Imp. Ass’n, 895 P.2d 1195 (Idaho 1995).
[10] Quinlivan Wexler LLP, “The 3rd Restatement of Torts—Shaping the Future of Products
Liability Law,” June 1, 1999, accessed March 1,
2011,http://library.findlaw.com/1999/Jun/1/127691.html.
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11.5 Tort Reform
L E A R N I N G O B J E C T I V E S
1. See why tort reform is advocated, why it is opposed, and what interests take
each side.
2. Understand some of the significant state reforms in the last two decades.
3. Know what federal reforms have been instituted.
The Cry for Reform
In 1988, The Conference Board published a study that resulted from a survey of more than 500 chief
executive officers from large and small companies regarding the effects of products liability on their firms.
The study concluded that US companies are less competitive in international business because of these
effects and that products-liability laws must be reformed. The reform effort has been under way ever
since, with varying degrees of alarms and finger-pointing as to who is to blame for the “tort crisis,” if there
even is one. Business and professional groups beat the drums for tort reform as a means to guarantee
“fairness” in the courts as well as spur US economic competitiveness in a global marketplace, while
plaintiffs’ attorneys and consumer advocates claim that businesses simply want to externalize costs by
denying recovery to victims of greed and carelessness.
Each side vilifies the other in very unseemly language: probusiness advocates call consumer-oriented
states “judicial hell-holes” and complain of “well-orchestrated campaign[s] by tort lawyer lobbyists and
allies to undo years of tort reform at the state level,” [1] while pro-plaintiff interests claim that there is
“scant evidence” of any tort abuse.[2] It would be more amusing if it were not so shrill and partisan.
Perhaps the most one can say with any certainty is that peoples’ perception of reality is highly colored by
their self-interest. In any event, there have been reforms (or, as the detractors say, “deforms”).
State Reforms
Prodded by astute lobbying by manufacturing and other business trade associations, state legislatures responded to
the cries of manufacturers about the hardships that the judicial transformation of the products-liability lawsuit
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ostensibly worked on them. Most state legislatures have enacted at least one of some three dozen “reform” proposal
pressed on them over the last two decades. Some of these measures do little more than affirm and clarify case law.
Among the most that have passed in several states are outlined in the next sections.
Statutes of Repose
Perhaps nothing so frightens the manufacturer as the occasional reports of cases involving products that
were fifty or sixty years old or more at the time they injured the plaintiff. Many states have addressed this
problem by enacting the so-called statute of repose. This statute establishes a time period, generally
ranging from six to twelve years; the manufacturer is not liable for injuries caused by the product after
this time has passed.
State-of-the-Art Defense
Several states have enacted laws that prevent advances in technology from being held against the
manufacturer. The fear is that a plaintiff will convince a jury a product was defective because it did not use
technology that was later available. Manufacturers have often failed to adopt new advances in technology
for fear that the change will be held against them in a products-liability suit. These new statutes declare
that a manufacturer has a valid defense if it would have been technologically impossible to have used the
new and safer technology at the time the product was manufactured.
Failure to Warn
Since it is often easier to prove that an injury resulted because the manufacturer failed to warn against a
certain use than it is to prove an injury was caused by a defective design, manufacturers are subjected to a
considerable degree of hindsight. Some of the state statutes limit the degree to which the failure to warn
can be used to connect the product and the injury. For example, the manufacturer has a valid defense if it
would have been impossible to foresee that the consumer might misuse the product in a certain way.
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Comparative Fault for Consumer Misuse
Contributory negligence is generally not a defense in a strict liability action, while assumption of risk is. In
states that have enacted so-called comparative fault statutes, the user’s damages are pegged to the
percentage of responsibility for the injury that the defendant bears. Thus if the consumer’s misuse of the
product is assessed as having been 20 percent responsible for the accident (or for the extent of the
injuries), the consumer is entitled to only 80 percent of damages, the amount for which the defendant
manufacturer is responsible.
Criminal Penalties
Not all state reform is favorable to manufacturers. Under the California Corporate Criminal Liability Act,
which took effect twenty years ago, companies and managers must notify a state regulatory agency if they
know that a product they are selling in California has a safety defect, and the same rule applies under
certain federal standards, as Toyota executives were informed by their lawyers following alarms about
sudden acceleration in some Toyota automobiles. Failure to provide notice may result in corporate and
individual criminal liability.
Federal Reform
Piecemeal reform of products-liability law in each state has contributed to the basic lack of uniformity
from state to state, giving it a crazy-quilt effect. In the nineteenth century, this might have made little
difference, but today most manufacturers sell in the national market and are subjected to the varying
requirements of the law in every state. For years there has been talk in and out of Congress of enacting a
federal products-liability law that would include reforms adopted in many states, as discussed earlier. So
far, these efforts have been without much success.
Congressional tort legislation is not the only possible federal action to cope with products-related injuries.
In 1972, Congress created the Consumer Product Safety Commission (CPSC) and gave the commission
broad power to act to prevent unsafe consumer products. The CPSC can issue mandatory safety standards
governing design, construction, contents, performance, packaging, and labeling of more than 10,000
consumer products. It can recall unsafe products, recover costs on behalf of injured consumers, prosecute
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those who violate standards, and require manufacturers to issue warnings on hazardous products. It also
regulates four federal laws previously administered by other departments: the Flammable Fabrics Act, the
Hazardous Substances Act, the Poison Prevention Packaging Act, and the Refrigerator Safety Act. In its
early years, the CPSC issued standards for bicycles, power mowers, television sets, architectural glass,
extension cords, book matches, pool slides, and space heaters. But the list of products is long, and the
CPSC’s record is mixed: it has come under fire for being short on regulation and for taking too long to
promulgate the relatively few safety standards it has issued in a decade.
K E Y T A K E A W A Y
Business advocates claim the American tort system—products-liability law
included—is broken and corrupted by grasping plaintiffs’ lawyers; plaintiffs’
lawyers say businesses are greedy and careless and need to be smacked into
recognition of its responsibilities to be more careful. The debate rages on, decade
after decade. But there have been some reforms at the state level, and at the
federal level the Consumer Product Safety Act sets out standards for safe products
and requires recalls for defective ones. It is regularly castigated for (1) being
officious and meddling or (2) being too timid.
E X E R C I S E S
1. Why is it so difficult to determine if there really is a “tort crisis” in the United
States?
2. What reforms have been made to state tort law?
3. What federal legislation affects consumer safety?
[1] American Tort Reform Association website, accessed March 1, 2011,http://www.atra.org.
[2] http://www.shragerlaw.com/html/legal_rights.html.
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11.6 Cases
Implied Warranty of Merchantability and the Requirement of a “Sale”
Sheeskin v. Giant Food, Inc.
318 A.2d 874 (Md. App. 1974)
Davidson, J.
Every Friday for over two years Nathan Seigel, age 73, shopped with his wife at a Giant Food Store. This
complex products liability case is before us because on one of these Fridays, 23 October 1970, Mr. Seigel
was carrying a six-pack carton of Coca-Cola from a display bin at the Giant to a shopping cart when one or
more of the bottles exploded. Mr. Seigel lost his footing, fell to the floor and was injured.
In the Circuit Court for Montgomery County, Mr. Seigel sued both the Giant Food, Inc., and the
Washington Coca-Cola Bottling Company, Inc., for damages resulting from their alleged negligence and
breach of an implied warranty. At the conclusion of the trial Judge Walter H. Moorman directed a verdict
in favor of each defendant.…
In an action based on breach of warranty it is necessary for the plaintiff to show the existence of the
warranty, the fact that the warranty was broken and that the breach of warranty was the proximate cause
of the loss sustained. [UCC] 2-314.…The retailer, Giant Food, Inc., contends that appellant failed to prove
that an implied warranty existed between himself and the retailer because he failed to prove that there
was a sale by the retailer to him or a contract of sale between the two. The retailer maintains that there
was no sale or contract of sale because at the time the bottles exploded Mr. Seigel had not yet paid for
them. We do not agree.
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[UCC] 2-314(1) states in pertinent part:
Unless excluded or modified, a warranty that the goods shall be merchantable is implied in a contract
for their sale if the seller is a merchant with respect to goods of that kind. [1] (emphasis added)
Thus, in order for the implied warranties of 2-314 to be applicable there must be a “contract for sale.” In
Maryland it has been recognized that neither a completed ‘sale’ nor a fully executed contract for sale is
required. It is enough that there be in existence an executory contract for sale.…
Here, the plaintiff has the burden of showing the existence of the warranty by establishing that at the time
the bottles exploded there was a contract for their sale existing between himself and the Giant. [Citation]
Mr. Titus, the manager of the Giant, testified that the retailer is a “self-service” store in which “the only
way a customer can buy anything is to select it himself and take it to the checkout counter.” He stated that
there are occasions when a customer may select an item in the store and then change his mind and put the
item back. There was no evidence to show that the retailer ever refused to sell an item to a customer once
it had been selected by him or that the retailer did not consider himself bound to sell an item to the
customer after the item had been selected. Finally, Mr. Titus said that an employee of Giant placed the
six-pack of Coca-Cola selected by Mr. Seigel on the shelf with the purchase price already stamped upon it.
Mr. Seigel testified that he picked up the six-pack with the intent to purchase it.
We think that there is sufficient evidence to show that the retailer’s act of placing the bottles upon the
shelf with the price stamped upon the six-pack in which they were contained manifested an intent to offer
them for sale, the terms of the offer being that it would pass title to the goods when Mr. Seigel presented
them at the check-out counter and paid the stated price in cash. We also think that the evidence is
sufficient to show that Mr. Seigel’s act of taking physical possession of the goods with the intent to
purchase them manifested an intent to accept the offer and a promise to take them to the checkout
counter and pay for them there.
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[UCC] 2-206 provides in pertinent part:
(1) Unless otherwise unambiguously indicated by the language or circumstances
(a) An offer to make a contract shall be construed as inviting acceptance in any manner and by any
medium reasonable in the circumstances.…
The Official Comment 1 to this section states:
Any reasonable manner of acceptance is intended to be regarded as available unless the offeror has made
quite clear that it will not be acceptable.
In our view the manner by which acceptance was to be accomplished in the transaction herein involved
was not indicated by either language or circumstances. The seller did not make it clear that acceptance
could not be accomplished by a promise rather than an act. Thus it is equally reasonable under the terms
of this specific offer that acceptance could be accomplished in any of three ways: 1) by the act of delivering
the goods to the check-out counter and paying for them; 2) by the promise to pay for the goods as
evidenced by their physical delivery to the check-out counter; and 3) by the promise to deliver the goods
to the check-out counter and to pay for them there as evidenced by taking physical possession of the goods
by their removal from the shelf.
The fact that customers, having once selected goods with the intent to purchase them, are permitted by
the seller to return them to the shelves does not preclude the possibility that a selection of the goods, as
evidenced by taking physical possession of them, could constitute a reasonable mode of acceptance.
Section 2-106(3) provides:
“Termination” occurs when either party pursuant to a power created by agreement or law puts an end to
the contract otherwise then for its breach. On “termination” all obligations which are still executory on
both sides are discharged but any right based on prior breach or performance survives.
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Here the evidence that the retailer permits the customer to “change his mind” indicates only an
agreement between the parties to permit the consumer to end his contract with the retailer irrespective of
a breach of the agreement by the retailer. It does not indicate that an agreement does not exist prior to the
exercise of this option by the consumer.…
Here Mr. Seigel testified that all of the circumstances surrounding his selection of the bottles were
normal; that the carton in which the bottles came was not defective; that in lifting the carton from the
shelf and moving it toward his basket the bottles neither touched nor were touched by anything other than
his hand; that they exploded almost instantaneously after he removed them from the shelf; and that as a
result of the explosion he fell injuring himself. It is obvious that Coca-Cola bottles which would break
under normal handling are not fit for the ordinary use for which they were intended and that the
relinquishment of physical control of such a defective bottle to a consumer constitutes a breach of
warranty. Thus the evidence was sufficient to show that when the bottles left the retailer’s control they did
not conform to the representations of the warranty of merchantability, and that this breach of the
warranty was the cause of the loss sustained.…
[Judgment in favor of Giant Foods is reversed and the case remanded for a new trial. Judgment in favor of
the bottler is affirmed because the plaintiff failed to prove that the bottles were defective when they were
delivered to the retailer.]
C A S E Q U E S T I O N S
1. What warranty did the plaintiff complain was breached here?
2. By displaying the soda pop, the store made an offer to its customers. How did the
court say such offers might be accepted?
3. Why did the court get into the discussion about “termination” of the contract?
4. What is the controlling rule of law applied in this case?
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Strict Liability and Bystanders
Embs v. Pepsi-Cola Bottling Co. of Lexington, Kentucky, Inc.
528 S.W.2d 703 (Ky. 1975)
Jukowsky, J.
On the afternoon of July 25, 1970 plaintiff-appellant entered the self-service retail store operated by the
defendant-appellee, Stamper’s Cash Market, Inc., for the purpose of “buying soft drinks for the kids.” She
went to an upright soft drink cooler, removed five bottles and placed them in a carton. Unnoticed by her, a
carton of Seven-Up was sitting on the floor at the edge of the produce counter about one foot from where
she was standing. As she turned away from the cooler she heard an explosion that sounded “like a
shotgun.” When she looked down she saw a gash in her leg, pop on her leg, green pieces of a bottle on the
floor and the Seven-Up carton in the midst of the debris. She did not kick or otherwise come into contact
with the carton of Seven-Up prior to the explosion. Her son, who was with her, recognized the green
pieces of glass as part of a Seven-Up bottle.
She was immediately taken to the hospital by Mrs. Stamper, a managing agent of the store. Mrs. Stamper
told her that a Seven-Up bottle had exploded and that several bottles had exploded that week. Before
leaving the store Mrs. Stamper instructed one of her children to clean up the mess. Apparently, all of the
physical evidence went out with the trash. The location of the Seven-Up carton immediately before the
explosion was not a place where such items were ordinarily kept.…
When she rested her case, the defendants-appellees moved for a directed verdict in their favor. The trial
court granted the motion on the grounds that the doctrine of strict product liability in tort does not extend
beyond users and consumers and that the evidence was insufficient to permit an inference by a reasonably
prudent man that the bottle was defective or if it was, when it became so.
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In [Citation] we adopted the view of strict product liability in tort expressed in Section 402 A of the
American Law Institute’s Restatement of Torts 2d.
402 A. Special Liability of Seller of Product for Physical Harm to
User or Consumer
(1) One who sells any product in a defective condition unreasonably dangerous to the user or to his
property is subject to liability for physical harm thereby caused to the ultimate user or consumer, or to his
property, if
(a) the seller is engaged in the business of selling such a product, and
(b) it is expected to and does reach the user or consumer without substantial change in the condition in
which it was sold.
(2) The rule stated in Subsection (1) applies although
(a) the seller has exercised all possible care in the preparation and sale of his product, and
(b) the user or consumer has not bought the product from or entered into any contractual relation with
the seller.
Comment f on that section makes it abundantly clear that this rule applies to any person engaged in the
business of supplying products for use or consumption, including any manufacturer of such a product and
any wholesale or retail dealer or distributor.
Comment c points out that on whatever theory, the justification for the rule has been said to be that the
seller, by marketing his product for use and consumption, has undertaken and assumed a special
responsibility toward any member of the consuming public who may be injured by it; that the public has
the right to and does expect that reputable sellers will stand behind their goods; that public policy
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demands that the burden of accidental injuries caused by products intended for consumption be placed
upon those who market them, and be treated as a cost of production against which liability insurance can
be obtained; and that the consumer of such products is entitled to the maximum of protection at the
hands of someone, and the proper persons to afford it are those who market the products.
The caveat to the section provides that the Institute expresses no opinion as to whether the rule may not
apply to harm to persons other than users or consumers. Comment on caveat o states the Institute
expresses neither approval nor disapproval of expansion of the rule to permit recovery by casual
bystanders and others who may come in contact with the product, and admits there may be no essential
reason why such plaintiffs should not be brought within the scope of protection afforded, other than they
do not have the same reasons for expecting such protection as the consumer who buys a marketed
product, and that the social pressure which has been largely responsible for the development of the rule
has been a consumer’s pressure, and there is not the same demand for the protection of casual
strangers.…
The caveat articulates the essential point: Once strict liability is accepted, bystander recovery is fait
accompli.
Our expressed public policy will be furthered if we minimize the risk of personal injury and property
damage by charging the costs of injuries against the manufacturer who can procure liability insurance and
distribute its expense among the public as a cost of doing business; and since the risk of harm from
defective products exists for mere bystanders and passersby as well as for the purchaser or user, there is
no substantial reason for protecting one class of persons and not the other. The same policy requires us to
maximize protection for the injured third party and promote the public interest in discouraging the
marketing of products having defects that are a menace to the public by imposing strict liability upon
retailers and wholesalers in the distributive chain responsible for marketing the defective product which
injures the bystander. The imposition of strict liability places no unreasonable burden upon sellers
because they can adjust the cost of insurance protection among themselves in the course of their
continuing business relationship.
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We must not shirk from extending the rule to the manufacturer for fear that the retailer or middleman
will be impaled on the sword of liability without regard to fault. Their liability was already established
under Section 402 A of the Restatement of Torts 2d. As a matter of public policy the retailer or
middleman as well as the manufacturer should be liable since the loss for injuries resulting from defective
products should be placed on those members of the marketing chain best able to pay the loss, who can
then distribute such risk among themselves by means of insurance and indemnity agreements.
[Citation]…
The result which we reach does not give the bystander a “free ride.” When products and consumers are
considered in the aggregate, bystanders, as a class, purchase most of the same products to which they are
exposed as bystanders. Thus, as a class, they indirectly subsidize the liability of the manufacturer,
middleman and retailer and in this sense do pay for the insurance policy tied to the product.…
For the sake of clarity we restate the extension of the rule. The protections of Section 402 A of the
Restatement of Torts 2d extend to bystanders whose injury from the defective product is reasonably
foreseeable.…
The judgment is reversed and the cause is remanded to the Clark Circuit Court for further proceedings
consistent herewith.
Stephenson, J. (dissenting):
I respectfully dissent from the majority opinion to the extent that it subjects the seller to liability. Every
rule of law in my mind should have a rational basis. I see none here.
Liability of the seller to the user, or consumer, is based upon warranty. Restatement, Second, Torts s
403A. To extend this liability to injuries suffered by a bystander is to depart from any reasonable basis
and impose liability by judicial fiat upon an otherwise innocent defendant. I do not believe that the
expression in the majority opinion which justifies this rule for the reason that the seller may procure
liability insurance protection is a valid legal basis for imposing liability without fault. I respectfully
dissent.
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C A S E Q U E S T I O N S
1. Why didn’t the plaintiff here use warranty as a theory of recovery, as Mr. Seigel did
in the previous case?
2. The court offers a rationale for the doctrine of strict products liability. What is it?
3. Restatement, Section 402A, by its terms extends protection “to the ultimate user or
consumer,” but Mrs. Embs [plaintiff-appellant] was not that. What rationale did the
court give for expanding the protection here?
4. Among the entities in the vertical distribution chain—manufacturer, wholesaler,
retailer—who is liable under this doctrine?
5. What argument did Judge Stephenson have in dissent? Is it a good one?
6. What is the controlling rule of law developed in this case?
Failure to Warn
Laaperi v. Sears, Roebuck & Co., Inc.
787 F.2d 726 C.A.1 (Mass. 1986)
Campbell, J.
In March 1976, plaintiff Albin Laaperi purchased a smoke detector from Sears. The detector,
manufactured by the Pittway Corporation, was designed to be powered by AC (electrical) current. Laaperi
installed the detector himself in one of the two upstairs bedrooms in his home.
Early in the morning of December 27, 1976, a fire broke out in the Laaperi home. The three boys in one of
the upstairs bedrooms were killed in the blaze. Laaperi’s 13-year-old daughter Janet, who was sleeping in
the other upstairs bedroom, received burns over 12 percent of her body and was hospitalized for three
weeks.
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The uncontroverted testimony at trial was that the smoke detector did not sound an alarm on the night of
the fire. The cause of the fire was later found to be a short circuit in an electrical cord that was located in a
cedar closet in the boys’ bedroom. The Laaperi home had two separate electrical circuits in the upstairs
bedrooms: one which provided electricity to the outlets and one which powered the lighting fixtures. The
smoke detector had been connected to the outlet circuit, which was the circuit that shorted and cut off.
Because the circuit was shorted, the AC-operated smoke detector received no power on the night of the
fire. Therefore, although the detector itself was in no sense defective (indeed, after the fire the charred
detector was tested and found to be operable), no alarm sounded.
Laaperi brought this diversity action against defendants Sears and Pittway, asserting negligent design,
negligent manufacture, breach of warranty, and negligent failure to warn of inherent dangers. The parties
agreed that the applicable law is that of Massachusetts. Before the claims went to the jury, verdicts were
directed in favor of defendants on all theories of liability other than failure to warn.…
Laaperi’s claim under the failure to warn theory was that he was unaware of the danger that the very short
circuit which might ignite a fire in his home could, at the same time, incapacitate the smoke detector. He
contended that had he been warned of this danger, he would have purchased a battery-powered smoke
detector as a back-up or taken some other precaution, such as wiring the detector to a circuit of its own, in
order better to protect his family in the event of an electrical fire.
The jury returned verdicts in favor of Laaperi in all four actions on the failure to warn claim. The jury
assessed damages in the amount of $350,000 [$1,050,000, or about $3,400,000 in 2010 dollars] each of
the three actions brought on behalf of the deceased sons, and $750,000 [about $2,500,000 in 2010
dollars] in the action brought on behalf of Janet Laaperi. The defendants’ motions for directed verdict and
judgment notwithstanding the verdict were denied, and defendants appealed.
Defendants ask us to declare that the risk that an electrical fire could incapacitate an AC-powered smoke
detector is so obvious that the average consumer would not benefit from a warning. This is not a trivial
argument; in earlier—some might say sounder—days, we might have accepted it.… Our sense of the
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current state of the tort law in Massachusetts and most other jurisdictions, however, leads us to conclude
that, today, the matter before us poses a jury question; that “obviousness” in a situation such as this would
be treated by the Massachusetts courts as presenting a question of fact, not of law. To be sure, it would be
obvious to anyone that an electrical outage would cause this smoke detector to fail. But the average
purchaser might not comprehend the specific danger that a fire-causing electrical problem can
simultaneously knock out the circuit into which a smoke detector is wired, causing the detector to fail at
the very moment it is needed. Thus, while the failure of a detector to function as the result of an electrical
malfunction due, say, to a broken power line or a neighborhood power outage would, we think, be obvious
as a matter of law, the failure that occurred here, being associated with the very risk—fire—for which the
device was purchased, was not, or so a jury could find.…
Finally, defendants contend that the award of $750,000 [$2.5 million in 2010 dollars] in damages to
Janet Laaperi was excessive, and should have been overturned by the district court.…
Janet Laaperi testified that on the night of the fire, she woke up and smelled smoke. She woke her friend
who was sleeping in her room, and they climbed out to the icy roof of the house. Her father grabbed her
from the roof and took her down a ladder. She was taken to the hospital. Although she was in “mild
distress,” she was found to be “alert, awake, [and] cooperative.” Her chest was clear. She was diagnosed as
having first and second degree burns of her right calf, both buttocks and heels, and her left lower back, or
approximately 12 percent of her total body area. She also suffered from a burn of her tracheobronchial
mucosa (i.e., the lining of her airway) due to smoke inhalation, and multiple superficial lacerations on her
right hand.
The jury undoubtedly, and understandably, felt a great deal of sympathy for a young girl who, at the age of
13, lost three brothers in a tragic fire. But by law the jury was only permitted to compensate her for those
damages associated with her own injuries. Her injuries included fright and pain at the time of and after
the fire, a three-week hospital stay, some minor discomfort for several weeks after discharge, and a
permanent scar on her lower back. Plaintiff has pointed to no cases, and we have discovered none, in
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which such a large verdict was sustained for such relatively minor injuries, involving no continuing
disability.
The judgments in favor of Albin Laaperi in his capacity as administrator of the estates of his three sons are
affirmed. In the action on behalf of Janet Laaperi, the verdict of the jury is set aside, the judgment of the
district court vacated, and the cause remanded to that court for a new trial limited to the issue of
damages.
C A S E Q U E S T I O N S
1. The “C.A. 1” under the title of the case means it is a US Court of Appeals case from
the First Circuit in Massachusetts. Why is this case in federal court?
2. Why does the court talk about its “sense of the current state of tort law in
Massachusetts” and how this case “would be treated by the Massachusetts courts,”
as if it were not in the state at all but somehow outside?
3. What rule of law is in play here as to the defendants’ liability?
4. This is a tragic case—three boys died in a house fire. Speaking dispassionately—if
not heartlessly—though, did the fire actually cost Mr. Laaperi, or did he lose $3.4
million (in 2010 dollars) as the result of his sons’ deaths? Does it make sense that he
should become a millionaire as a result? Who ends up paying this amount? (The
lawyers’ fees probably took about half.)
5. Is it likely that smoke-alarm manufactures and sellers changed the instructions as a
result of this case?
[1] Uniform Commercial Code, Section 2-316.
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11.7 Summary and Exercises
Summary
Products liability describes a type of claim—for injury caused by a defective product—and not a separate
theory of liability. In the typical case, three legal doctrines may be asserted: (1) warranty, (2) negligence,
and (3) strict liability.
If a seller asserts that a product will perform in a certain manner or has certain characteristics, he has
given an express warranty, and he will be held liable for damages if the warranty is breached—that is, if
the goods do not live up to the warranty. Not every conceivable claim is an express warranty; the courts
permit a certain degree of “puffing.”
An implied warranty is one created by law. Goods sold by a merchant-seller carry an implied warranty of
merchantability, meaning that they must possess certain characteristics, such as being of average quality
for the type described and being fit for the ordinary purposes for which they are intended.
An implied warranty of fitness for a particular purpose is created whenever a seller knows or has reason to
know that the buyer is relying on the seller’s knowledge and skill to select a product for the buyer’s
particular purposes.
Under UCC Article 2, the seller also warrants that he is conveying good title and that the goods are free of
any rightful claim by a third person.
UCC Article 2 permits sellers to exclude or disclaim warranties in whole or in part. Thus a seller may
exclude express warranties. He may also disclaim many implied warranties—for example, by noting that
the sale is “as is.” The Magnuson-Moss Act sets out certain types of information that must be included in
any written warranty. The act requires the manufacturer or seller to label the warranty as either “full” or
“limited” depending on what types of defects are covered and what the customer must do to obtain repair
or replacement. The act also abolishes “phantom warranties.”
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Privity once stood as a bar to recovery in suits brought by those one or more steps removed in the
distribution chain from the party who breached a warranty. But the nearly universal trend in the state
courts has been to abolish privity as a defense.
Because various impediments stand in the way of warranty suits, courts have adopted a tort theory of
strict liability, under which a seller is liable for injuries resulting from the sale of any product in a
defective condition if it is unreasonably dangerous to the user or consumer. Typical issues in strict liability
cases are these: Is the defendant a seller engaged in the business of selling? Was the product sold in a
defective condition? Was it unreasonably dangerous, either on its face or because of a failure to warn? Did
the product reach the consumer in an unchanged condition? Strict liability applies regardless of how
careful the seller was and regardless of his lack of contractual relation with the consumer or user.
Manufacturers can also be held liable for negligence—most often for faulty design of products and
inadequate warnings about the hazards of using the product.
The products-liability revolution prompted many state legislatures to enact certain laws limiting to some
degree the manufacturer’s responsibility for defective products. These laws include statutes of repose and
provide a number of other defenses.’
E X E R C I S E S
1. Ralph’s Hardware updated its accounting system and agreed to purchase a
computer system from a manufacturer, Bits and Bytes (BB). During contract
negotiations, BB’s sales representative promised that the system was “A-1” and
“perfect.” However, the written contract, which the parties later signed, disclaimed
all warranties, express and implied. After installation the computer produced only
random numbers and letters, rather than the desired accounting information. Is BB
liable for breaching an express
warranty? Why?
2. Kate owned a small grocery store. One day John went to the store and purchased a
can of chip dip that was, unknown to Kate or John, adulterated. John became
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seriously ill after eating the dip and sued Kate for damages on the grounds that she
breached an implied warranty of merchantability. Is Kate liable? Why?
3. Carrie visited a neighborhood store to purchase some ham, which a salesperson cut
by machine in the store. The next day she made a ham sandwich. In eating the
sandwich, Carrie bit into a piece of cartilage in the ham. As a result, Carrie lost a
tooth, had to undergo root canal treatments, and must now wear a full-coverage
crown to replace the tooth. Is the store liable for the damage? Why?
4. Clarence, a business executive, decided to hold a garage sale. At the sale, his
neighbor Betty mentioned to Clarence that she was the catcher on her city-league
baseball team and was having trouble catching knuckleball pitches, which required a
special catcher’s mitt. Clarence pulled an old mitt from a pile of items that were on
sale and said, “Here, try this.” Betty purchased the mitt but discovered during her
next game that it didn’t work. Has Clarence breached an express or implied
warranty? Why?
5. Sarah purchased several elegant picture frames to hang in her dorm room. She also
purchased a package of self-sticking hangers. Late one evening, while Sarah was
studying business law in the library, the hangers came loose and her frames came
crashing to the floor. After Sarah returned to her room and discovered the rubble,
she examined the box in which the hangers were packaged and found the following
language: “There are no warranties except for the description on this package and
specifically there is NO IMPLIED WARRANTY OF MERCHANTABILITY.” Assuming the
hangers are not of fair, average, ordinary quality, would the hanger company be
liable for breaching an implied warranty of merchantability? Why?
6. A thirteen-year-old boy received a Golfing Gizmo—a device for training novice
golfers—as a gift from his mother. The label on the shipping carton and the cover of
the instruction booklet urged players to “drive the ball with full power” and further
stated: “COMPLETELY SAFE BALL WILL NOT HIT PLAYER.” But while using the device,
the boy was hit in the eye by the ball. Should lack of privity be a defense to the
manufacturer? The manufacturer argued that the Gizmo was a “completely safe”
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training device only when the ball is hit squarely, and—the defendant argued—
plaintiffs could not reasonably expect the Gizmo to be “completely safe” under all
circumstances, particularly those in which the player hits beneath the ball. What
legal argument is this, and is it valid?
7. A bank repossessed a boat and sold it to Donald. During the negotiations with
Donald, Donald stated that he wanted to use the boat for charter service in Florida.
The bank officers handling the sale made no representations concerning the boat
during negotiations. Donald later discovered that the boat was defective and sued
the bank for breach of warranty. Is the bank liable? Why?
8. Tom Anderson, the produce manager at the Thriftway Market in Pasco, Washington,
removed a box of bananas from the top of a stack of produce. When he reached for
a lug of radishes that had been under the bananas, a six-inch spider—Heteropoda
venatoria, commonly called a banana spider—leaped from some wet burlap onto his
left hand and bit him. Nine months later he died of heart failure. His wife brought an
action against Associated Grocers, parent company of Thriftway Market, on theories
of (1) strict products liability under Restatement, Section 402(a); (2) breach of the
implied warranty of merchantability; and (3) negligence. The trial court ruled against
the plaintiff on all three theories. Was that a correct ruling? Explain.
9. A broken water pipe flooded a switchboard at RCA’s office. The flood tripped the
switchboard circuit breakers and deactivated the air-conditioning system. Three
employees were assigned to fix it: an electrical technician with twelve years on-the-
job training, a licensed electrician, and an electrical engineer with twenty years of
experience who had studied power engineering in college. They switched on one of
the circuit breakers, although the engineer said he knew that one was supposed to
test the operation of a wet switchboard before putting it back into use. There was a
“snap” and everyone ran from the room up the stairs and a “big ball of fire” came
after them up the stairs. The plaintiffs argued that the manufacturer of the circuit
breaker had been negligent in failing to give RCA adequate warnings about the
circuit breakers. How should the court rule, and on what theory should it rule?
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10. Plaintiff’s business was to convert vans to RVs, and for this purpose it had used a 3M
adhesive to laminate carpeting to the van walls. This adhesive, however, failed to
hold the fabric in place in hot weather, so Plaintiff approached Northern Adhesive
Co., a manufacturer of adhesives, to find a better one. Plaintiff told Northern why it
wanted the adhesive, and Northern—Defendant—sent several samples to Plaintiff
to experiment with. Northern told Plaintiff that one of the adhesives, Adhesive
7448, was “a match” for the 3M product that previously failed. Plaintiff tested the
samples in a cool plant and determined that Adhesive 7448 was better than the 3M
product. Defendant had said nothing except that “what they would ship would be
like the sample. It would be the same chemistry.” Plaintiff used the adhesive during
the fall and winter; by spring complaints of delamination came in: Adhesive 7448
failed just as the 3M product had. Over 500 vans had to be repaired. How should the
court rule on Plaintiff’s claims of breach of (1) express warranty, (2) implied
warranty of merchantability, and (3) implied warranty of fitness for a particular
purpose?
S E L F – T E S T Q U E S T I O N S
1. In a products-liability case
a. only tort theories are typically asserted
b. both tort and contract theories are typically asserted
c. strict liability is asserted only when negligence is not asserted
d. breach of warranty is not asserted along with strict liability
An implied warranty of merchantability
a. is created by an express warranty
b. is created by law
c. is impossible for a seller to disclaim
d. can be disclaimed by a seller only if the disclaimer is in writing
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A possible defense to breach of warranty is
a. lack of privity
b. absence of an express warranty
c. disclaimer of implied warranties
d. all of the above
Under the strict liability rule in Restatement, Section 402A, the seller is liable for
all injuries resulting from a product
a. even though all possible care has been exercised
b. regardless of the lack of a contract with the user
c. in both of the above situations
d. in none of the above situations
An individual selling her car could be liable
a. for breaching the implied warranty of merchantability
b. under the strict liability theory
c. for breaching the implied warranty of fitness
d. under two of the above
S E L F – T E S T A N S W E R S
1. b
2. b
3. d
4. c
5. d
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Chapter 24
The Nature and Regulation of Real Estate and
the Environment
LEARNING OBJECTIVES
After reading this chapter, you should understand the following:
1. The various kinds of interests (or “estates”) in real
property
2. The various rights that come with ownership of real property
3. What easements are, how they are created, and how they function
4. How ownership of real property is regulated by tort law, by agreement, and by the
public interest (through eminent domain)
5. The various ways in which environmental laws affect the ownership and use of real
property
Real property is an important part of corporate as well as individual wealth. As a consequence, the role of
the corporate real estate manager has become critically important within the corporation. The real estate
manager must be aware not only of the value of land for purchase and sale but also of proper lease
negotiation, tax policies and assessments, zoning and land development, and environmental laws.
In this chapter and in Chapter 25 “The Transfer of Real Estate by Sale” and Chapter 26 “Landlord and
Tenant Law”, we focus on regulation of land use and the environment (see Figure 24.1 “Chapter
Overview”). We divide our discussion of the nature of real estate into three major categories: (1) estates;
(2) rights that are incidental to the possession and ownership of land—for example, the right to air, water,
and minerals; and (3) easements—the rights in lands of others.
Chapter 24 from Advanced Business Law and the Legal Environment was adapted
by The Saylor Foundation under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0
license without attribution as requested by the work’s original creator or licensee. © 2014, The Saylor Foundation.
http://www.saylor.org/site/textbooks/Advanced%20Business%20Law%20and%20the%20Legal%20Environment
http://creativecommons.org/licenses/by-sa/3.0/
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24.1 Estates
LEARNING OBJECTIVE
1. Distinguish between the various kinds of estates, or interests, in real property that
the law recognizes.
In property law, an estate is an interest in real property, ranging from absolute dominion and control to
bare possession. Ordinarily when we think of property, we think of only one kind: absolute ownership.
The owner of a car has the right to drive it where and when she wants, rebuild it, repaint it, and sell it or
scrap it. The notion that the owner might lose her property when a particular event happens is foreign to
our concept of personal property. Not so with real property. You would doubtless think it odd if you were
sold a used car subject to the condition that you not paint it a different color—and that if you did, you
would automatically be stripped of ownership. But land can be sold that way. Land and other real
property can be divided into many categories of interests, as we will see. (Be careful not to confuse the
various types of interests in real property with the forms of ownership, such as joint tenancy. An interest
in real property that amounts to an estate is a measure of the degree to which a thing is owned; the form
of ownership deals with the particular person or persons who own it.)
Figure 24.1 Chapter Overview
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The common law distinguishes estates along two main axes: (1) freeholds versus leaseholds and (2)
present versus future interests. A freehold estate is an interest in land that has an uncertain duration.
The freehold can be outright ownership—called the fee simple absolute—or it can be an interest in the
land for the life of the possessor; in either case, it is impossible to say exactly how long the estate will last.
In the case of one who owns property outright, her estate will last until she sells or transfers it; in the case
of a life estate, it will last until the death of the owner or another specified individual. A
leasehold estate is one whose termination date is usually known. A one-year lease, for example, will
expire precisely at the time stated in the lease agreement.
A present estate is one that is currently owned and enjoyed; a future estate is one that will come into the
owner’s possession upon the occurrence of a particular event. In this chapter, we consider both present
and future freehold interests; leasehold interests we save forChapter 26 “Landlord and Tenant Law”.
Present Estates (Freeholds)
Fee Simple Absolute
The strongest form of ownership is known as thefee simple absolute (or fee simple, or merely fee). This is
what we think of when we say that someone “owns” the land. As one court put it, “The grant of a fee in
land conveys to the grantee complete ownership, immediately and forever, with the right of possession
from boundary to boundary and from the center of the earth to the sky, together with all the lawful uses
thereof.” [1] Although the fee simple may be encumbered by a mortgage (you may borrow money against
the equity in your home) or an easement (you may grant someone the right to walk across your backyard),
the underlying control is in the hands of the owner. Though it was once a complex matter in determining
whether a person had been given a fee simple interest, today the law presumes that the estate being
transferred is a fee simple, unless the conveyance expressly states to the contrary. (In her will, Lady Gaga
grants her five-thousand-acre ranch “to my screen idol, Tilda Swinton.” On the death of Lady Gaga,
Swinton takes ownership of the ranch outright in fee simple absolute.)
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Fee Simple Defeasible
Not every transfer of real property creates a fee simple absolute. Some transfers may limit the estate. Any
transfer specifying that the ownership will terminate upon a particular happening is known as a
fee simple defeasible. Suppose, for example, that Mr. Warbucks conveys a tract of land “to Miss
Florence Nightingale, for the purpose of operating her hospital and for no other purpose. Conveyance to
be good as long as hospital remains on the property.” This grant of land will remain the property of Miss
Nightingale and her heirs as long as she and they maintain a hospital. When they stop doing so, the land
will automatically revert to Mr. Warbucks or his heirs, without their having to do anything to regain title.
Note that the conveyance of land could be perpetual but is not absolute, because it will remain the
property of Miss Nightingale only so long as she observes the conditions in the grant.
Life Estates
An estate measured by the life of a particular person is called a life estate. A conventional life estate is
created privately by the parties themselves. The simplest form is that conveyed by the following words: “to
Scarlett for life.” Scarlett becomes a life tenant; as such, she is the owner of the property and may occupy
it for life or lease it or even sell it, but the new tenant or buyer can acquire only as much as Scarlett has to
give, which is ownership for her life (i.e., all she can sell is a life estate in the land, not a fee simple
absolute). If Scarlett sells the house and dies a month later, the buyer’s interest would terminate. A life
estate may be based on the life of someone other than the life tenant: “to Scarlett for the life of Rhett.”
The life tenant may use the property as though he were the owner in fee simple absolute with this
exception: he may not act so as to diminish the value of the property that will ultimately go to the
remainderman—the person who will become owner when the life estate terminates. The life tenant must
pay the life estate for ordinary upkeep of the property, but the remainderman is responsible for
extraordinary repairs.
Some life estates are created by operation of law and are known as legal life estates. The most common
form is a widow’s interest in the real property of her husband. In about one-third of the states, a woman is
entitled to dower, a right to a percentage (often one-third) of the property of her husband when he dies.
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Most of these states give a widower a similar interest in the property of his deceased wife. Dower is an
alternative to whatever is bequeathed in the will; the widow has the right to elect the share stated in the
will or the share available under dower. To prevent the dower right from upsetting the interests of remote
purchasers, the right may be waived on sale by having the spouse sign the deed.
Future Estates
To this point, we have been considering present estates. But people also can have future interests in real
property. Despite the implications of its name, the future interest is owned now but is not available to be
used or enjoyed now. For the most part, future interests may be bought and sold, just as land held in fee
simple absolute may be bought and sold. There are several classes of future interests, but in general there
are two major types: reversion and remainder.
Reversion
A reversion arises whenever the estate transferred has a duration less than that originally owned by the
transferor. A typical example of a simple reversion is that which arises when a life estate is conveyed. The
ownership conveyed is only for the life; when the life tenant dies, the ownership interest reverts to the
grantor. Suppose the grantor has died in the meantime. Who gets the reversion interest? Since the
reversion is a class of property that is owned now, it can be inherited, and the grantor’s heirs would take
the reversion at the subsequent death of the life tenant.
Remainder
The transferor need not keep the reversion interest for himself. He can give that interest to someone else,
in which case it is known as a remainder interest, because the remainder of the property is being
transferred. Suppose the transferor conveys land with these words: “to Scarlett for life and then to Rhett.”
Scarlett has a life estate; the remainder goes to Rhett in fee simple absolute. Rhett is said to have a vested
remainder interest, because on Scarlett’s death, he or his heirs will automatically become owners of the
property. Some remainder interests are contingent—and are therefore known as contingent remainder
interests—on the happening of a certain event: “to my mother for her life, then to my sister if she marries
Harold before my mother dies.” The transferor’s sister will become the owner of the property in fee simple
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only if she marries Harold while her mother is alive; otherwise, the property will revert to the transferor
or his heirs. The number of permutations of reversions and remainders can become quite complex, far
more than we have space to discuss in this text.
KEY TAKEAWAY
An estate is an interest in real property. Estates are of many kinds, but one generic
difference is between ownership estates and possessory estates. Fee simple estates and
life estates are ownership estates, while leasehold interests are possessory. Among
ownership estates, the principal division is between present estates and future estates.
An owner of a future estate has an interest that can be bought and sold and that will
ripen into present possession at the end of a period of time, at the end of the life of
another, or with the happening of some contingent event.
EXERCISES
1. Jessa owns a house and lot on 9th Avenue. She sells the house to the Hartley family,
who wish to have a conveyance from her that says, “to Harriet Hartley for life,
remainder to her son, Alexander Sandridge.” Alexander is married to Chloe, and
they have three children, Carmen, Sarah, and Michael. Who has a future interest,
and who has a present interest? What is the correct legal term for Harriet’s estate?
Does Alexander, Carmen, Sarah, or Michael have any part of the estate at the time
Jessa conveys to Harriet using the stated language?
2. After Harriet dies, Alexander wants to sell the property. Alexander and Chloe’s
children are all eighteen years of age or older. Can he convey the property by his
signature alone? Who else needs to sign?
[1] Magnolia Petroleum Co. v. Thompson, 106 F.2d 217 (8th Cir. 1939).
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24.2 Rights Incident to Possession and Ownership of
Real Estate
LEARNING OBJECTIVE
1. Understand that property owners have certain rights in the airspace above
their land, in the minerals beneath their land, and even in water that adjoins
their land.
Rights to Airspace
The traditional rule was stated by Lord Coke: “Whoever owns the soil owns up to the sky.” This traditional
rule remains valid today, but its application can cause problems. A simple example would be a person who
builds an extension to the upper story of his house so that it hangs out over the edge of his property line
and thrusts into the airspace of his neighbor. That would clearly be an encroachment on the neighbor’s
property. But is it trespass when an airplane—or an earth satellite—flies over your backyard? Obviously,
the courts must balance the right to travel against landowners’ rights. In U.S. v. Causby, [1] the Court
determined that flights over private land may constitute a diminution in the property value if they are so
low and so frequent as to be a direct and immediate interference with the enjoyment and use of land.
Rights to the Depths
Lord Coke’s dictum applies to the depths as well as the sky. The owner of the surface has the right to the oil, gas, and
minerals below it, although this right can be severed and sold separately. Perplexing questions may arise in the case of
oil and gas, which can flow under the surface. Some states say that oil and gas can be owned by the owner of the
surface land; others say that they are not owned until actually extracted—although the property owner may sell the
exclusive right to extract them from his land. But states with either rule recognize that oil and gas are capable of being
“captured” by drilling that causes oil or gas from under another plot of land to run toward the drilled hole. Since the
possibility of capture can lead to wasteful drilling practices as everyone nearby rushes to capture the precious
commodities, many states have enacted statutes requiring landowners to share the resources.
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Rights to Water
The right to determine how bodies of water will be used depends on basic property rules. Two different
approaches to water use in the United States—eastern and western—have developed over time (seeFigure
24.2 “Water Rights”). Eastern states, where water has historically been more plentiful, have adopted the
so-called riparian rights theory, which itself can take two forms. Riparian refers to land that includes a
part of the bed of a waterway or that borders on a public watercourse. A riparian owner is one who owns
such land. What are the rights of upstream and downstream owners of riparian land regarding use of the
waters? One approach is the “natural flow” doctrine: Each riparian owner is entitled to have the river or
other waterway maintained in its natural state. The upstream owner may use the river for drinking
water
or for washing but may not divert it to irrigate his crops or to operate his mill if doing so would materially
change the amount of the flow or the quality of the water. Virtually all eastern states today are not so
restrictive and rely instead on a “reasonable use” doctrine, which permits the benefit to be derived from
use of the waterway to be weighed against the gravity of the harm. This approach is illustrated in Hoover
v. Crane, (see Section 24.6.1 “Reasonable Use Doctrine”. [2]
Figure 24.2 Water Rights
In contrast to riparian rights doctrines, western states have adopted the prior appropriation doctrine. This
rule looks not to equality of interests but to priority in time: first in time is first in right. The first person
to use the water for a beneficial purpose has a right superior to latecomers. This rule applies even if the
first user takes all the water for his own needs and even if other users are riparian owners. This rule
developed in water-scarce states in which development depended on incentives to use rather than hoard
water. Today, the prior appropriation doctrine has come under criticism because it gives incentives to
those who already have the right to the water to continue to use it profligately, rather than to those who
might develop more efficient means of using it.
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KEY TAKEAWAY
Property owners have certain rights in the airspace above their land. They also
have rights in subsurface minerals, which include oil and gas. Those property
owners who have bodies of water adjacent to their land will also have certain
rights to withdraw or impound water for their own use. Regarding US water law,
the reasonable use doctrine in the eastern states is distinctly different from the
prior appropriation doctrine in western states.
EXERCISES
1. Steve Hannaford farms in western Nebraska. The farm has passed to
succeeding generations of Hannafords, who use water from the North Platte
River for irrigation purposes. The headlands of the North Platte are in
Colorado, but use of the water from the North Platte by Nebraskans preceded
use of the water by settlers in Colorado. What theory of water rights governs
Nebraska and Colorado residents? Can the state of Colorado divert and use
water in such a way that less of it reaches western Nebraska and the
Hannaford farm? Why or why not?
2. Jamie Stoner decides to put solar panels on the south face of his roof. Jamie
lives on a block of one- and two-bedroom bungalows in South Miami, Florida.
In 2009, someone purchases the house next door and within two years
decides to add a second and third story. This proposed addition will
significantly decrease the utility of Jamie’s solar array. Does Jamie have any
rights that would limit what his new neighbors can do on their own land?
[1] U.S. v. Causby, 328 U.S. 256 (1946).
[2] Hoover v. Crane, 362 Mich. 36, 106 N.W.2d 563 (1960).
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24.3 Easements: Rights in the Lands of Others
LEARNING OBJECTIVES
1. Explain the difference between an easement and a license.
2. Describe the ways in which easements can be created.
Definition
An easement is an interest in land created by agreement that permits one person to make use of
another’s estate. This interest can extend to a profit, the taking of something from the other’s land.
Though the common law once distinguished between an easement and profit, today the distinction has
faded, and profits are treated as a type of easement. An easement must be distinguished from a
mere license, which is permission, revocable at the will of the owner, to make use of the owner’s land. An
easement is an estate; a license is personal to the grantee and is not assignable.
The two main types of easements are affirmative and negative. An affirmative easement gives a landowner
the right to use the land of another (e.g., crossing it or using water from it), while a negative easement,
by contrast, prohibits the landowner from using his land in ways that would affect the holder of the
easement. For example, the builder of a solar home would want to obtain negative easements from
neighbors barring them from building structures on their land that would block sunlight from falling on
the solar home. With the growth of solar energy, some states have begun to provide stronger protection by
enacting laws that regulate one’s ability to interfere with the enjoyment of sunlight. These laws range from
a relatively weak statute in Colorado, which sets forth rules for obtaining easements, to the much stronger
statute in California, which says in effect that the owner of a solar device has a vested right to continue to
receive the sunlight.
Another important distinction is made between easements appurtenant and easements in gross.
An easement appurtenantbenefits the owner of adjacent land. The easement is thus appurtenant to the
holder’s land. The benefited land is called the dominant tenement, and the burdened land—that is, the
land subject to the easement—is called the servient tenement (see Figure 24.3 “Easement
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Appurtenant”). An easement in gross is granted independent of the easement holder’s ownership or
possession of land. It is simply an independent right—for example, the right granted to a local delivery
service to drive its trucks across a private roadway to gain access to homes at the other end.
Figure 24.3 Easement Appurtenant
Unless it is explicitly limited to the grantee, an easement appurtenant “runs with the land.” That is, when
the dominant tenement is sold or otherwise conveyed, the new owner automatically owns the easement. A
commercial easement in gross may be transferred—for instance, easements to construct pipelines,
telegraph and telephone lines, and railroad rights of way. However, most noncommercial easements in
gross are not transferable, being deemed personal to the original owner of the easement. Rochelle sells
her friend Mrs. Nanette—who does not own land adjacent to Rochelle—an easement across her country
farm to operate skimobiles during the winter. The easement is personal to Mrs. Nanette; she could not sell
the easement to anyone else.
Creation
Easements may be created by express agreement, either in deeds or in wills. The owner of the dominant
tenement may buy the easement from the owner of the servient tenement or may reserve the easement for
himself when selling part of his land. But courts will sometimes allow implied easements under certain
circumstances. For instance, if the deed refers to an easement that bounds the premises—without
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describing it in any detail—a court could conclude that an easement was intended to pass with the sale of
the property.
An easement can also be implied from prior use. Suppose a seller of land has two lots, with a driveway
connecting both lots to the street. The only way to gain access to the street from the back lot is to use the
driveway, and the seller has always done so. If the seller now sells the back lot, the buyer can establish an
easement in the driveway through the front lot if the prior use was (1) apparent at the time of sale, (2)
continuous, and (3) reasonably necessary for the enjoyment of the back lot. The rule of implied easements
through prior use operates only when the ownership of the dominant and servient tenements was
originally in the same person.
Use of the Easement
The servient owner may use the easement—remember, it is on or under or above his land—as long as his
use does not interfere with the rights of the easement owner. Suppose you have an easement to walk along
a path in the woods owned by your neighbor and to swim in a private lake that adjoins the woods. At the
time you purchased the easement, your neighbor did not use the lake. Now he proposes to swim in it
himself, and you protest. You would not have a sound case, because his swimming in the lake would not
interfere with your right to do so. But if he proposed to clear the woods and build a mill on it, obliterating
the path you took to the lake and polluting the lake with chemical discharges, then you could obtain an
injunction to bar him from interfering with your easement.
The owner of the dominant tenement is not restricted to using his land as he was at the time he became
the owner of the easement. The courts will permit him to develop the land in some “normal” manner. For
example, an easement on a private roadway for the benefit of a large estate up in the hills would not be
lost if the large estate were ultimately subdivided and many new owners wished to use the roadway; the
easement applies to the entire portion of the original dominant tenement, not merely to the part that
abuts the easement itself. However, the owner of an easement appurtenant to one tract of land cannot use
the easement on another tract of land, even if the two tracts are adjacent.
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KEY TAKEAWAY
An easement appurtenant runs with the land and benefits the dominant
tenement, burdening the servient tenement. An easement, generally, has a
specific location or description within or over the servient tenement. Easements
can be created by deed, by will, or by implication.
EXERCISE
1. Beth Delaney owns property next to Kerry Plemmons. The deed to Delaney’s
property notes that she has access to a well on the Plemmons property “to
obtain water for household use.” The well has been dry for many generations
and has not been used by anyone on the Plemmons property or the Delaney
property for as many generations. The well predated Plemmons’s ownership
of the property; as the servient tenement, the Plemmons property was
burdened by this easement dating back to 1898. Plemmons hires a company
to dig a very deep well near one of his outbuildings to provide water for his
horses. The location is one hundred yards from the old well. Does the Delaney
property have any easement to use water from the new well?
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24.4 Regulation of Land Use
LEARNING OBJECTIVES
1. Compare the various ways in which law limits or restricts the right to use your
land in any way that you decide is best for you.
2. Distinguish between regulation by common law and regulation by public acts
such as zoning or eminent domain.
3. Understand that property owners may restrict the uses of land by voluntary
agreement, subject to important public policy considerations.
Land use regulation falls into three broad categories: (1) restriction on the use of land through tort law,
(2) private regulation by agreement, and (3) public ownership or regulation through the powers of
eminent domain and zoning.
Regulation of Land Use by Tort Law
Tort law is used to regulate land use in two ways: (1) The owner may become liable for certain activities
carried out on the real estate that affect others beyond the real estate. (2) The owner may be liable to
persons who, upon entering the real estate, are injured.
Landowner’s Activities
The two most common torts in this area are nuisance and trespass. A common-law nuisance is an
interference with the use and enjoyment of one’s land. Examples of nuisances are excessive noise
(especially late at night), polluting activities, and emissions of noxious odors. But the activity must
produce substantial harm, not fleeting, minor injury, and it must produce those effects on the reasonable
person, not on someone who is peculiarly allergic to the complained-of activity. A person who suffered
migraine headaches at the sight of croquet being played on a neighbor’s lawn would not likely win a
nuisance lawsuit. While the meaning of nuisance is difficult to define with any precision, this common-
law cause of action is a primary means for landowners to obtain damages for invasive environmental
harms.
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A trespass is the wrongful physical invasion of or entry upon land possessed by another. Loud noise
blaring out of speakers in the house next door might be a nuisance but could not be a trespass, because
noise is not a physical invasion. But spraying pesticides on your gladiolas could constitute a trespass on
your neighbor’s property if the pesticide drifts across the boundary.
Nuisance and trespass are complex theories, a full explanation of which would consume far more space
than we have. What is important to remember is that these torts are two-edged swords. In some
situations, the landowner himself will want to use these theories to sue trespassers or persons creating a
nuisance, but in other situations, the landowner will be liable under these theories for his own activities.
Injury to Persons Entering the Real Estate
Traditionally, liability for injury has depended on the status of the person who enters the real estate.
Trespassers
If the person is an intruder without permission—a trespasser—the landowner owes him no duty of care
unless he knows of the intruder’s presence, in which case the owner must exercise reasonable care in his
activities and warn of hidden dangers on his land of which he is aware. A known trespasser is someone
whom the landowner actually sees on the property or whom he knows frequently intrudes on the
property, as in the case of someone who habitually walks across the land. If a landowner knows that
people frequently walk across his property and one day he puts a poisonous chemical on the ground to
eliminate certain insects, he is obligated to warn those who continue to walk on the grounds. Intentional
injury to known trespassers is not allowed, even if the trespasser is a criminal intent on robbery, for the
law values human life above property rights.
Children
If the trespasser is a child, a different rule applies in most states. This is the doctrine
of attractive nuisance. Originally this rule was enunciated to deal with cases in which something on the
land attracted the child to it, like a swimming pool. In recent years, most courts have dropped the
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requirement that the child must have been attracted to the danger. Instead, the following elements of
proof are necessary to make out a case of attractive nuisance (Restatement of Torts, Section 339):
1. The child must have been injured by a structure or other artificial condition.
2. The possessor of the land (not necessarily the owner) must have known or should have known
that young children would be likely to trespass.
3. The possessor must have known or should have known that the artificial condition exists and that
it posed an unreasonable risk of serious injury.
4. The child must have been too young to appreciate the danger that the artificial condition posed.
5. The risk to the child must have far outweighed the utility of the artificial condition to the
possessor.
6. The possessor did not exercise reasonable care in protecting the child or eliminating the danger.
Old refrigerators, open gravel pits, or mechanisms that a curious child would find inviting are all
examples of attractive nuisance. Suppose Farmer Brown keeps an old buggy on his front lawn, accessible
from the street. A five-year-old boy clambers up the buggy one day, falls through a rotted floorboard, and
breaks his leg. Is Farmer Brown liable? Probably so. The child was too young to appreciate the danger
posed by the buggy, a structure. The farmer should have appreciated that young children would be likely
to come onto the land when they saw the buggy and that they would be likely to climb up onto the buggy.
Moreover, he should have known, if he did not know in fact, that the buggy, left outside for years without
being tended, would pose an unreasonable risk. The buggy’s utility as a decoration was far overbalanced
by the risk that it posed to children, and the farmer failed to exercise reasonable care.
Licensees
A nontrespasser who comes onto the land without being invited, or if invited, comes for purposes
unconnected with any business conducted on the premises, is known as a licensee. This class of visitors
to the land consists of (1) social guests (people you invite to your home for a party); (2) a salesman, not
invited by the owner, who wishes to sell something to the owner or occupier of the property; and (3)
persons visiting a building for a purpose not connected with the business on the land (e.g., students who
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visit a factory to see how it works). The landowner owes the same duty of care to licensees that he owes to
known trespassers. That is, he must warn them against hidden dangers of which he is aware, and he must
exercise reasonable care in his activities to ensure that they are not injured.
Invitees
A final category of persons entering land is that of invitee. This is one who has been invited onto the
land, usually, though not necessarily, for a business purpose of potential economic benefit to the owner or
occupier of the premises. This category is confusing because it sounds as though it should include social
guests (who clearly are invited onto the premises), but traditionally social guests are said to be licensees.
Invitees include customers of stores, users of athletic and other clubs, customers of repair shops, strollers
through public parks, restaurant and theater patrons, hotel guests, and the like. From the owner’s
perspective, the major difference between licensees and invitees is that he is liable for injuries resulting to
the latter from hidden dangers that he should have been aware of, even if he is not actually aware of the
dangers. How hidden the dangers are and how broad the owner’s liability is depends on the
circumstances, but liability sometimes can be quite broad. Difficult questions arise in lawsuits brought by
invitees (or business invitees, as they are sometimes called) when the actions of persons other than the
landowner contribute to the injury.
The foregoing rules dealing with liability for persons entering the land are the traditional rules at common
law. In recent years, some courts have moved away from the rigidities and sometimes perplexing
differences between trespassers, licensees, and invitees. By court decision, several states have now
abolished such distinctions and hold the proprietor, owner, or occupier liable for failing to maintain the
premises in a reasonably safe condition. According to the California Supreme Court,
A man’s life or limb does not become less worthy of protection by the law nor a loss less worthy of
compensation under the law because he has come upon the land of another without permission or with
permission but without a business purpose. Reasonable people do not ordinarily vary their conduct
depending upon such matters, and to focus upon the status of the injured party as a trespasser, licensee,
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or invitee in order to determine the question whether the landowner has a duty of care, is contrary to our
modern social mores and humanitarian values. Where the occupier of land is aware of a concealed
condition involving in the absence of precautions an unreasonable risk of harm to those coming in contact
with it and is aware that a person on the premises is about to come in contact with it, the trier of fact can
reasonably conclude that a failure to warn or to repair the condition constitutes negligence. Whether or
not a guest has a right to expect that his host will remedy dangerous conditions on his account, he should
reasonably be entitled to rely upon a warning of the dangerous condition so that he, like the host, will be
in a position to take special precautions when he comes in contact with it. [1]
Private Regulation of Land Use by Agreement
A restrictive covenant is an agreement regarding the use of land that “runs with the land.” In effect, it is a
contractual promise that becomes part of the property and that binds future owners. Violations of
covenants can be redressed in court in suits for damages or injunctions but will not result in reversion of
the land to the seller.
Usually, courts construe restrictive covenants narrowly—that is, in a manner most conducive to free use of
the land by the ultimate owner (the person against whom enforcement of the covenant is being sought).
Sometimes, even when the meaning of the covenant is clear, the courts will not enforce it. For example,
when the character of a neighborhood changes, the courts may declare the covenant a nullity. Thus a
restriction on a one-acre parcel to residential purposes was voided when in the intervening thirty years a
host of businesses grew up around it, including a bowling alley, restaurant, poolroom, and sewage
disposal plant. [2]
An important nullification of restrictive covenants came in 1947 when the US Supreme Court struck down
as unconstitutional racially restrictive covenants, which barred blacks and other minorities from living on
land so burdened. The Supreme Court reasoned that when a court enforces such a covenant, it acts in a
discriminatory manner (barring blacks but not whites from living in a home burdened with the covenant)
and thus violates the Fourteenth Amendment’s guarantee of equal protection of the laws. [3]
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Public Control of Land Use through Eminent Domain
The government may take private property for public purposes. Its power to do so is known as eminent
domain. The power of eminent domain is subject to constitutional limitations. entitled to “just
compensation” for his loss. These requirements are sometimes difficult to apply.Under the Fifth
Amendment, the property must be put to public use, and the owner is
Public Use
The requirement of public use normally means that the property will be useful to the public once the state
has taken possession—for example, private property might be condemned to construct a highway.
Although not allowed in most circumstances, the government could even condemn someone’s property in
order to turn around and sell it to another individual, if a legitimate public purpose could be shown. For
example, a state survey in the mid-1960s showed that the government owned 49 percent of Hawaii’s land.
Another 47 percent was controlled by seventy-two private landowners. Because this concentration of land
ownership (which dated back to feudal times) resulted in a critical shortage of residential land, the
Hawaiian legislature enacted a law allowing the government to take land from large private estates and
resell it in smaller parcels to homeowners. In 1984, the US Supreme Court upheld the law, deciding that
the land was being taken for a public use because the purpose was “to attack certain perceived evils of
concentrated property ownership.” [4] Although the use must be public, the courts will not inquire into the
necessity of the use or whether other property might have been better suited. It is up to government
authorities to determine whether and where to build a road, not the courts.
The limits of public use were amply illustrated in the Supreme Court’s 2002 decision of Kelo v. New
London, [5] in which Mrs. Kelo’s house was condemned so that the city of New London, in Connecticut,
could create a marina and industrial park to lease to Pfizer Corporation. The city’s motives were to create
a higher tax base for property taxes. The Court, following precedent in Midkiff and other cases, refused to
invalidate the city’s taking on constitutional grounds. Reaction from states was swift; many states passed
new laws restricting the bases for state and municipal governments to use powers of eminent domain, and
many of these laws also provided additional compensation to property owners whose land was taken.
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Just Compensation
The owner is ordinarily entitled to the fair market value of land condemned under eminent domain. This
value is determined by calculating the most profitable use of the land at the time of the taking, even
though it was being put to a different use. The owner will have a difficult time collecting lost profits; for
instance, a grocery store will not usually be entitled to collect for the profits it might have made during the
next several years, in part because it can presumably move elsewhere and continue to make profits and in
part because calculating future profits is inherently speculative.
Taking
The most difficult question in most modern cases is whether the government has in fact “taken” the
property. This is easy to answer when the government acquires title to the property through
condemnation proceedings. But more often, a government action is challenged when a law or regulation
inhibits the use of private land. Suppose a town promulgates a setback ordinance, requiring owners along
city sidewalks to build no closer to the sidewalk than twenty feet. If the owner of a small store had only
twenty-five feet of land from the sidewalk line, the ordinance would effectively prevent him from housing
his enterprise, and the ordinance would be a taking. Challenging such ordinances can sometimes be
difficult under traditional tort theories because the government is immune from suit in some of these
cases. Instead, a theory of inverse condemnation has developed, in which the plaintiff private property
owner asserts that the government has condemned the property, though not through the traditional
mechanism of a condemnation proceeding.
Public Control of Land Use through Zoning
Zoning is a technique by which a city or other municipality regulates the type of activity to be permitted
in geographical areas within its boundaries. Though originally limited to residential, commercial, and
industrial uses, today’s zoning ordinances are complex sets of regulations. A typical municipality might
have the following zones: residential with a host of subcategories (such as for single-family and multiple-
family dwellings), office, commercial, industrial, agricultural, and public lands. Zones may be exclusive, in
which case office buildings would not be permitted in commercial zones, or they may be cumulative, so
that a more restricted use would be allowed in a less restrictive zone. Zoning regulations do more than
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specify the type of use: they often also dictate minimum requirements for parking, open usable space,
setbacks, lot sizes, and the like, and maximum requirements for height, length of side lots, and so on.
Nonconforming Uses
When a zoning ordinance is enacted, it will almost always affect existing property owners, many of whom
will be using their land in ways no longer permitted under the ordinance. To avoid the charge that they
have thereby “taken” the property, most ordinances permit previous nonconforming uses to continue,
though some ordinances limit the nonconforming uses to a specified time after becoming effective. But
this permission to continue a nonconforming use is narrow; it extends only to the specific use to which the
property was put before the ordinance was enacted. A manufacturer of dresses that suddenly finds itself in
an area zoned residential may continue to use its sewing machines, but it could not develop a sideline in
woodworking.
Variances
Sometimes an owner may desire to use his property in ways not permitted under an existing zoning
scheme and will ask the zoning board for a variance—authority to carry on a nonconforming use. The
board is not free to grant a variance at its whim. The courts apply three general tests to determine the
validity of a variance: (1) The land must be unable to yield a reasonable return on the uses allowed by the
zoning regulation. (2) The hardship must be unique to the property, not to property generally in the area.
(3) If granted, the variance must not change the essential character of the neighborhood.
KEY TAKEAWAY
Land use regulation can mean (1) restrictions on the use of land through tort law,
(2) private regulation—by agreement, or (3) regulation through powers of eminent
domain or zoning.
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EXERCISES
1. Give one example of the exercise of eminent domain. In order to exercise its
power under eminent domain, must the government actually take eventual
ownership of the property that is “taken”?
2. Felix Unger is an adult, trespassing for the first time on Alan Spillborghs’s
property. Alan has been digging a deep grave in his backyard for his beloved
Saint Bernard, Maximilian, who has just died. Alan stops working on the grave
when it gets dark, intending to return to the task in the morning. He seldom
sees trespassers cutting through his backyard. Felix, in the dark, after visiting
the local pub, decides to take a shortcut through Alan’s yard and falls into the
grave. He breaks his leg. What is the standard of care for Alan toward Felix or
other infrequent trespassers? If Alan has no insurance for this accident, would
the law make Alan responsible?
3. Atlantic Cement owns and operates a cement plant in New York State. Nearby
residents are exposed to noise, soot, and dust and have experienced lowered
property values as a result of Atlantic Cement’s operations. Is there a
common-law remedy for nearby property owners for losses occasioned by
Atlantic’s operations? If so, what is it called?
[1] Rowland v. Christian, 443 P.2d 561 (Cal. 1968).
[2] Norris v. Williams, 54 A.2d 331 (Md. 1947).
[3] Shelley v. Kraemer, 334 U.S. 1 (1947).
[4] Hawaii Housing Authority v. Midkiff, 467 U.S. 229 (1984).
[5] Kelo v. New London, 545 U.S. 469 (2005).
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24.5 Environmental Law
LEARNING OBJECTIVES
1. Describe the major federal laws that govern business activities that may
adversely affect air quality and water quality.
2. Describe the major federal laws that govern waste disposal and chemical
hazards including pesticides.
In one sense, environmental law is very old. Medieval England had smoke control laws that established
the seasons when soft coal could be burned. Nuisance laws give private individuals a limited control over
polluting activities of adjacent landowners. But a comprehensive set of US laws directed toward general
protection of the environment is largely a product of the past quarter-century, with most of the legislative
activity stemming from the late 1960s and later, when people began to perceive that the environment was
systematically deteriorating from assaults by rapid population growth and greatly increased automobile
driving, vast proliferation of factories that generate waste products, and a sharp rise in the production of
toxic materials. Two of the most significant developments in environmental law came in 1970, when the
National Environmental Policy Act took effect and the Environmental Protection Agency became the first
of a number of new federal administrative agencies to be established during the decade.
National Environmental Policy Act
Signed into law by President Nixon on January 1, 1970, the National Environmental Policy Act (NEPA)
declared that it shall be the policy of the federal government, in cooperation with state and local
governments, “to create and maintain conditions under which man and nature can exist in productive
harmony, and fulfill the social, economic, and other requirements of present and future generations of
Americans
.…
The Congress recognizes that each person should enjoy a healthful environment and that
each person has a responsibility to contribute to the preservation and enhancement of the
environment.”[1]
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The most significant aspect of NEPA is its requirement that federal agencies prepare
an environmental impact statement in every recommendation or report on proposals for legislation
and whenever undertaking a major federal action that significantly affects environmental quality. The
statement must (1) detail the environmental impact of the proposed action, (2) list any unavoidable
adverse impacts should the action be taken, (3) consider alternatives to the proposed action, (4) compare
short-term and long-term consequences, and (5) describe irreversible commitments of resources. Unless
the impact statement is prepared, the project can be enjoined from proceeding. Note that NEPA does not
apply to purely private activities but only to those proposed to be carried out in some manner by federal
agencies.
Environmental Protection Agency
The Environmental Protection Agency (EPA) has been in the forefront of the news since its creation in
1970. Charged with monitoring environmental practices of industry, assisting the government and private
business to halt environmental deterioration, promulgating regulations consistent with federal
environmental policy, and policing industry for violations of the various federal environmental statutes
and regulations, the EPA has had a pervasive influence on American business. Business Week noted the
following in 1977: “Cars rolling off Detroit’s assembly line now have antipollution devices as standard
equipment. The dense black smokestack emissions that used to symbolize industrial prosperity are rare,
and illegal, sights. Plants that once blithely ran discharge water out of a pipe and into a river must apply
for permits that are almost impossible to get unless the plants install expensive water treatment
equipment. All told, the EPA has made a sizable dent in man-made environmental filth.” [2]
The EPA is especially active in regulating water and air pollution and in overseeing the disposition of toxic
wastes and chemicals. To these problems we now turn.
Water Pollution
Clean Water Act
Legislation governing the nation’s waterways goes back a long time. The first federal water pollution
statute was the Rivers and Harbors Act of 1899. Congress enacted new laws in 1948, 1956, 1965, 1966, and
1970. But the centerpiece of water pollution enforcement is the Clean Water Act of 1972 (technically, the
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Federal Water Pollution Control Act Amendments of 1972), as amended in 1977 and by the Water Quality
Act of 1987. The Clean Water Act is designed to restore and maintain the “chemical, physical, and
biological integrity of the Nation’s waters.”[3] It operates on the states, requiring them to designate the
uses of every significant body of water within their borders (e.g., for drinking water, recreation,
commercial fishing) and to set water quality standards to reduce pollution to levels appropriate for each
use.
Congress only has power to regulate interstate commerce, and so the Clean Water Act is applicable only to
“navigable waters” of the United States. This has led to disputes over whether the act can apply, say, to an
abandoned gravel pit that has no visible connection to navigable waterways, even if the gravel pit provides
habitat for migratory birds. In Solid Waste Agency of Northern Cook County v. Army Corps of
Engineers, the US Supreme Court said no. [4]
Private Industry
The Clean Water Act also governs private industry and imposes stringent standards on the discharge of
pollutants into waterways and publicly owned sewage systems. The act created an effluent permit system
known as the National Pollutant Discharge Elimination System. To discharge any pollutants into
navigable waters from a “point source” like a pipe, ditch, ship, or container, a company must obtain a
certification that it meets specified standards, which are continually being tightened. For example, until
1983, industry had to use the “best practicable technology” currently available, but after July 1, 1984, it
had to use the “best available technology” economically achievable. Companies must limit certain kinds of
“conventional pollutants” (such as suspended solids and acidity) by “best conventional control
technology.”
Other EPA Water Activities
Federal law governs, and the EPA regulates, a number of other water control measures. Ocean dumping,
for example, is the subject of the Marine Protection, Research, and Sanctuaries Act of 1972, which gives
the EPA jurisdiction over wastes discharged into the oceans. The Clean Water Act gives the EPA and the
US Army Corps of Engineers authority to protect waters, marshlands, and other wetlands against
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degradation caused by dredging and fills. The EPA also oversees state and local plans for restoring general
water quality to acceptable levels in the face of a host of non-point-source pollution. The Clean Water Act
controls municipal sewage systems, which must ensure that wastewater is chemically treated before being
discharged from the sewage system.
Obviously, of critical importance to the nation’s health is the supply of drinking water. To ensure its
continuing purity, Congress enacted the Safe Drinking Water Act of 1974, with amendments passed in
1986 and 1996. This act aims to protect water at its sources: rivers, lakes, reservoirs, springs, and
groundwater wells. (The act does not regulate private wells that serve fewer than twenty-five individuals.)
This law has two strategies for combating pollution of drinking water. It establishes national standards for
drinking water derived from both surface reservoirs and underground aquifers. It also authorizes the EPA
to regulate the injection of solid wastes into deep wells (as happens, for instance, by leakage from
underground storage tanks).
Air Pollution
The centerpiece of the legislative effort to clean the atmosphere is the Clean Air Act of 1970 (amended in
1975, 1977, and 1990). Under this act, the EPA has set two levels of National Ambient Air Quality
Standards (NAAQS). The primary standards limit the ambient (i.e., circulating) pollution that affects
human health; secondary standards limit pollution that affects animals, plants, and property. The heart of
the Clean Air Act is the requirement that subject to EPA approval, the states implement the standards that
the EPA establishes. The setting of these pollutant standards was coupled with directing the states to
develop state implementation plans (SIPs), applicable to appropriate industrial sources in the state, in
order to achieve these standards. The act was amended in 1977 and 1990 primarily to set new goals
(dates) for achieving attainment of NAAQS since many areas of the country had failed to meet the
deadlines.
Beyond the NAAQS, the EPA has established several specific standards to control different types of air
pollution. One major type is pollution that mobile sources, mainly automobiles, emit. The EPA requires
new cars to be equipped with catalytic converters and to use unleaded gasoline to eliminate the most
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noxious fumes and to keep them from escaping into the atmosphere. To minimize pollution from
stationary sources, the EPA also imposes uniform standards on new industrial plants and those that have
been substantially modernized. And to safeguard against emissions from older plants, states must
promulgate and enforce SIPs.
The Clean Air Act is even more solicitous of air quality in certain parts of the nation, such as designated
wilderness areas and national parks. For these areas, the EPA has set standards to prevent significant
deterioration in order to keep the air as pristine and clear as it was centuries ago.
The EPA also worries about chemicals so toxic that the tiniest quantities could prove fatal or extremely
hazardous to health. To control emission of substances like asbestos, beryllium, mercury, vinyl chloride,
benzene, and arsenic, the EPA has established or proposed various National Emissions Standards for
Hazardous Air Pollutants.
Concern over acid rain and other types of air pollution prompted Congress to add almost eight hundred
pages of amendments to the Clean Air Act in 1990. (The original act was fifty pages long.) As a result of
these amendments, the act was modernized in a manner that parallels other environmental laws. For
instance, the amendments established a permit system that is modeled after the Clean Water Act. And the
amendments provide for felony convictions for willful violations, similar to penalties incorporated into
other statutes.
The amendments include certain defenses for industry. Most important, companies are protected from
allegations that they are violating the law by showing that they were acting in accordance with a permit. In
addition to this “permit shield,” the law also contains protection for workers who unintentionally violate
the law while following their employers’ instructions.
Waste Disposal
Though pollution of the air by highly toxic substances like benzene or vinyl chloride may seem a problem
removed from that of the ordinary person, we are all in fact polluters. Every year, the United States
generates approximately 230 million tons of “trash”—about 4.6 pounds per person per day. Less than
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one-quarter of it is recycled; the rest is incinerated or buried in landfills. But many of the country’s
landfills have been closed, either because they were full or because they were contaminating groundwater.
Once groundwater is contaminated, it is extremely expensive and difficult to clean it up. In the 1965 Solid
Waste Disposal Act and the 1970 Resource Recovery Act, Congress sought to regulate the discharge of
garbage by encouraging waste management and recycling. Federal grants were available for research and
training, but the major regulatory effort was expected to come from the states and municipalities.
But shocking news prompted Congress to get tough in 1976. The plight of homeowners near Love Canal in
upstate New York became a major national story as the discovery of massive underground leaks of toxic
chemicals buried during the previous quarter century led to evacuation of hundreds of homes. Next came
the revelation that Kepone, an exceedingly toxic pesticide, had been dumped into the James River in
Virginia, causing a major human health hazard and severe damage to fisheries in the James and
downstream in the Chesapeake Bay. The rarely discussed industrial dumping of hazardous wastes now
became an open controversy, and Congress responded in 1976 with the Resource Conservation and
Recovery Act (RCRA) and the Toxic Substances Control Act (TSCA) and in 1980 with the Comprehensive
Environmental Response, Compensation, and Liability Act (CERCLA).
Resource Conservation and Recovery Act
The RCRA expresses a “cradle-to-grave” philosophy: hazardous wastes must be regulated at every stage.
The act gives the EPA power to govern their creation, storage, transport, treatment, and disposal. Any
person or company that generates hazardous waste must obtain a permit (known as a “manifest”) either
to store it on its own site or ship it to an EPA-approved treatment, storage, or disposal facility. No longer
can hazardous substances simply be dumped at a convenient landfill. Owners and operators of such sites
must show that they can pay for damage growing out of their operations, and even after the sites are
closed to further dumping, they must set aside funds to monitor and maintain the sites safely.
This philosophy can be severe. In 1986, the Supreme Court ruled that bankruptcy is not a sufficient reason
for a company to abandon toxic waste dumps if state regulations reasonably require protection in the
interest of public health or safety. The practical effect of the ruling is that trustees of the bankrupt
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company must first devote assets to cleaning up a dump site, and only from remaining assets may they
satisfy creditors. [5] Another severity is RCRA’s imposition of criminal liability, including fines of up to
$25,000 a day and one-year prison sentences, which can be extended beyond owners to individual
employees, as discussed in U.S. v. Johnson & Towers, Inc., et al., (seeSection 24.6.2 “Criminal Liability of
Employees under RCRA”).
Comprehensive Environmental Response, Compensation, and Liability Act
The CERCLA, also known as the Superfund, gives the EPA emergency powers to respond to public health
or environmental dangers from faulty hazardous waste disposal, currently estimated to occur at more
than seventeen thousand sites around the country. The EPA can direct immediate removal of wastes
presenting imminent danger (e.g., from train wrecks, oil spills, leaking barrels, and fires). Injuries can be
sudden and devastating; in 1979, for example, when a freight train derailed in Florida, ninety thousand
pounds of chlorine gas escaped from a punctured tank car, leaving 8 motorists dead and 183 others
injured and forcing 3,500 residents within a 7-mile radius to be evacuated. The EPA may also carry out
“planned removals” when the danger is substantial, even if immediate removal is not necessary.
The EPA prods owners who can be located to voluntarily clean up sites they have abandoned. But if the
owners refuse, the EPA and the states will undertake the task, drawing on a federal trust fund financed
mainly by taxes on the manufacture or import of certain chemicals and petroleum (the balance of the fund
comes from general revenues). States must finance 10 percent of the cost of cleaning up private sites and
50 percent of the cost of cleaning up public facilities. The EPA and the states can then assess unwilling
owners’ punitive damages up to triple the cleanup costs.
Cleanup requirements are especially controversial when applied to landowners who innocently purchased
contaminated property. To deal with this problem, Congress enacted the Superfund Amendment and
Reauthorization Act in 1986, which protects innocent landowners who—at the time of purchase—made an
“appropriate inquiry” into the prior uses of the property. The act also requires companies to publicly
disclose information about hazardous chemicals they use. We now turn to other laws regulating chemical
hazards.
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Chemical Hazards
Toxic Substances Control Act
Chemical substances that decades ago promised to improve the quality of life have lately shown their
negative side—they have serious adverse side effects. For example, asbestos, in use for half a century,
causes cancer and asbestosis, a debilitating lung disease, in workers who breathed in fibers decades ago.
The result has been crippling disease and death and more than thirty thousand asbestos-related lawsuits
filed nationwide. Other substances, such as polychlorinated biphenyls (PCBs) and dioxin, have caused
similar tragedy. Together, the devastating effects of chemicals led to enactment of the TSCA, designed to
control the manufacture, processing, commercial distribution, use, and disposal of chemicals that pose
unreasonable health or environmental risks. (The TSCA does not apply to pesticides, tobacco, nuclear
materials, firearms and ammunition, food, food additives, drugs, and cosmetics—all are regulated by
other federal laws.)
The TSCA gives the EPA authority to screen for health and environmental risks by requiring companies to
notify the EPA ninety days before manufacturing or importing new chemicals. The EPA may demand that
the companies test the substances before marketing them and may regulate them in a number of ways,
such as requiring the manufacturer to label its products, to keep records on its manufacturing and
disposal processes, and to document all significant adverse reactions in people exposed to the chemicals.
The EPA also has authority to ban certain especially hazardous substances, and it has banned the further
production of PCBs and many uses of asbestos.
Both industry groups and consumer groups have attacked the TSCA. Industry groups criticize the act
because the enforcement mechanism requires mountainous paperwork and leads to widespread delay.
Consumer groups complain because the EPA has been slow to act against numerous chemical substances.
The debate continues.
Pesticide Regulation
The United States is a major user of pesticides, substances that eliminate troublesome insects, rodents,
fungi, and bacteria, consuming more than a billion pounds a year in the form of thirty-five thousand
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separate chemicals. As useful as they can be, like many chemical substances, pesticides can have serious
side effects on humans and plant and animal life. Beginning in the early 1970s, Congress enacted major
amendments to the Federal Insecticide, Fungicide, and Rodenticide Act of 1947 and the Federal Food,
Drug, and Cosmetic Act (FFDCA) of 1906.
These laws direct the EPA to determine whether pesticides properly balance effectiveness against safety. If
the pesticide can carry out its intended function without causing unreasonable adverse effects on human
health or the environment, it may remain on the market. Otherwise, the EPA has authority to regulate or
even ban its distribution and use. To enable the EPA to carry out its functions, the laws require
manufacturers to provide a wealth of data about the way individual pesticides work and their side effects.
The EPA is required to inspect pesticides to ensure that they conform to their labeled purposes, content,
and safety, and the agency is empowered to certify pesticides for either general or restricted use. If a
pesticide is restricted, only those persons certified in approved training programs may use it. Likewise,
under the Pesticide Amendment to the FFDCA, the EPA must establish specific tolerances for the residue
of pesticides on feed crops and both raw and processed foods. The Food and Drug Administration (for
agricultural commodities) and the US Department of Agriculture (for meat, poultry, and fish products)
enforce these provisions.
Other Types of Environmental Controls
Noise Regulation
Under the Noise Regulation Act of 1972, Congress has attempted to combat a growing menace to US
workers, residents, and consumers. People who live close to airports and major highways, workers who
use certain kinds of machinery (e.g., air compressors, rock drills, bulldozers), and consumers who use
certain products, such as power mowers and air conditioners, often suffer from a variety of ailments. The
Noise Regulation Act delegates to the EPA power to limit “noise emissions” from these major sources of
noise. Under the act, manufacturers may not sell new products that fail to conform to the noise standards
the EPA sets, and users are forbidden from dismantling noise control devices installed on these products.
Moreover, manufacturers must label noisy products properly. Private suits may be filed against violators,
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and the act also permits fines of up to $25,000 per day and a year in jail for those who seek to avoid its
terms.
Radiation Controls
The terrifying effects of a nuclear disaster became frighteningly clear when the Soviet Union’s nuclear
power plant at Chernobyl exploded in early 1986, discharging vast quantities of radiation into the world’s
airstream and affecting people thousands of miles away. In the United States, the most notorious nuclear
accident occurred at the Three Mile Island nuclear utility in Pennsylvania in 1979, crippling the facility for
years because of the extreme danger and long life of the radiation. Primary responsibility for overseeing
nuclear safety rests with the Nuclear Regulatory Commission, but many other agencies and several federal
laws (including the Clean Air Act; the Federal Water Pollution Control Act; the Safe Drinking Water Act;
the Uranium Mill Tailings Radiation Control Act; the Marine Protection, Research, and Sanctuaries Act;
the Nuclear Waste Policy Act of 1982; the CERCLA; and the Ocean Dumping Act) govern the use of
nuclear materials and the storage of radioactive wastes (some of which will remain severely dangerous for
thousands of years). Through many of these laws, the EPA has been assigned the responsibility of setting
radiation guidelines, assessing new technology, monitoring radiation in the environment, setting limits on
release of radiation from nuclear utilities, developing guidance for use of X-rays in medicine, and helping
to plan for radiation emergencies.
KEY TAKEAWAY
Laws limiting the use of one’s property have been around for many years;
common-law restraints (e.g., the law of nuisance) exist as causes of action against
those who would use their property to adversely affect the life or health of others
or the value of their neighbors’ property. Since the 1960s, extensive federal laws
governing the environment have been enacted. These include laws governing air,
water, chemicals, pesticides, solid waste, and nuclear activities. Some laws include
criminal penalties for noncompliance.
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EXERCISES
1. Who is responsible for funding CERCLA? That is, what is the source of funds
for cleanups of hazardous waste?
2. Why is it necessary to have criminal penalties for noncompliance with
environmental laws?
3. What is the role of states in setting standards for clean air and clean water?
4. Which federal act sets up a “cradle-to-grave” system for handling waste?
5. Why are federal environmental laws necessary? Why not let the states
exclusively govern in the area of environmental protection?
[1] 42 United States Code, Section 4321 et seq.
[2] “The Tricks of the Trade-off,” Business Week, April 4, 1977, 72.
[3] 33 United States Code, Section 1251.
[4] Solid Waste Agency of Northern Cook County v. Army Corps of Engineers, 531 U.S. 159
(2001).
[5] Midlantic National Bank v. New Jersey, 474 U.S. 494 (1986).
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24.6 Cases
Reasonable Use Doctrine
Hoover v. Crane
362 Mich. 36, 106 N.W.2d 563 (1960)
EDWARDS, JUSTICE
This appeal represents a controversy between plaintiff cottage and resort owners on an inland Michigan
lake and defendant, a farmer with a fruit orchard, who was using the lake water for irrigation. The
chancellor who heard the matter ruled that defendant had a right to reasonable use of lake water. The
decree defined such reasonable use in terms which were unsatisfactory to plaintiffs who have appealed.
The testimony taken before the chancellor pertained to the situation at Hutchins Lake, in Allegan county,
during the summer of 1958. Defendant is a fruit farmer who owns a 180-acre farm abutting on the lake.
Hutchins Lake has an area of 350 acres in a normal season. Seventy-five cottages and several farms,
including defendant’s, abut on it. Defendant’s frontage is approximately 1/4 mile, or about 10% of the
frontage of the lake.
Hutchins Lake is spring fed. It has no inlet but does have an outlet which drains south. Frequently in the
summertime the water level falls so that the flow at the outlet ceases.
All witnesses agreed that the summer of 1958 was exceedingly dry and plaintiffs’ witnesses testified that
Hutchins Lake’s level was the lowest it had ever been in their memory. Early in August, defendant began
irrigation of his 50-acre pear orchard by pumping water out of Hutchins Lake. During that month the lake
level fell 6 to 8 inches—the water line receded 50 to 60 feet and cottagers experienced severe difficulties
with boating and swimming.
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* * *
The tenor of plaintiffs’ testimony was to attribute the 6- to 8-inch drop in the Hutchins Lake level in that
summer to defendant’s irrigation activities. Defendant contended that the decrease was due to natural
causes, that the irrigation was of great benefit to him and contributed only slightly to plaintiff’s
discomfiture. He suggests to us:
One could fairly say that because plaintiffs couldn’t grapple with the unknown causes that admittedly
occasioned a greater part of the injury complained of, they chose to grapple mightily with the defendant
because he is known and visible.
The circuit judge found it impossible to determine a normal lake level from the testimony, except that the
normal summer level of the lake is lower than the level at which the lake ceases to drain into the outlet. He
apparently felt that plaintiffs’ problems were due much more to the abnormal weather conditions of the
summer of 1958 than to defendant’s irrigation activities.
His opinion concluded:
Accepting the reasonable use theory advanced by plaintiffs it appears to the court that the most equitable
disposition of this case would be to allow defendant to use water from the lake until such time when his
use interferes with the normal use of his neighbors. One quarter inch of water from the lake ought not to
interfere with the rights and uses of defendant’s neighbors and this quantity of water ought to be
sufficient in time of need to service 45 acres of pears. A meter at the pump, sealed if need be, ought to be a
sufficient safeguard. Pumping should not be permitted between the hours of 11 p.m. and 7 a.m. Water
need be metered only at such times as there is no drainage into the outlet.
The decree in this suit may provide that the case be kept open for the submission of future petitions and
proofs as the conditions permit or require.
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* * *
Michigan has adopted the reasonable-use rule in determining the conflicting rights of riparian owners to
the use of lake water.
In 1874, Justice COOLEY said:
It is therefore not a diminution in the quantity of the water alone, or an alteration in its flow, or either or
both of these circumstances combined with injury, that will give a right of action, if in view of all the
circumstances, and having regard to equality of right in others, that which has been done and which
causes the injury is not unreasonable. In other words, the injury that is incidental to a reasonable
enjoyment of the common right can demand no redress. Dumont v. Kellogg, 29 Mich 420, 425.
And in People v. Hulbert, the Court said:
No statement can be made as to what is such reasonable use which will, without variation or qualification,
apply to the facts of every case. But in determining whether a use is reasonable we must consider what the
use is for; its extent, duration, necessity, and its application; the nature and size of the stream, and the
several uses to which it is put; the extent of the injury to the one proprietor and of the benefit to the other;
and all other facts which may bear upon the reasonableness of the use. Red River Roller Mills v. Wright,
30 Minn 249, 15 NW 167, and cases cited.
The Michigan view is in general accord with 4 Restatement, Torts, §§ 851–853.
* * *
We interpret the circuit judge’s decree as affording defendant the total metered equivalent in pumpage of
1/4 inch of the content of Hutchins Lake to be used in any dry period in between the cessation of flow
from the outlet and the date when such flow recommences. Where the decree also provides for the case to
be kept open for future petitions based on changed conditions, it would seem to afford as much protection
for plaintiffs as to the future as this record warrants.
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Both resort use and agricultural use of the lake are entirely legitimate purposes. Neither serves to remove
water from the watershed. There is, however, no doubt that the irrigation use does occasion some water
loss due to increased evaporation and absorption. Indeed, extensive irrigation might constitute a threat to
the very existence of the lake in which all riparian owners have a stake; and at some point the use of the
water which causes loss must yield to the common good.
The question on this appeal is, of course, whether the chancellor’s determination of this point was
unreasonable as to plaintiffs. On this record, we cannot overrule the circuit judge’s view that most of
plaintiffs’ 1958 plight was due to natural causes. Nor can we say, if this be the only irrigation use intended
and the only water diversion sought, that use of the amount provided in the decree during the dry season
is unreasonable in respect to other riparian owners.
Affirmed.
CASE QUESTIONS
1. If the defendant has caused a diminution in water flow, an alteration of the water
flow, and the plaintiff is adversely affected, why would the Supreme Court of
Michigan not provide some remedy?
2. Is it possible to define an injury that is “not unreasonable”?
3. Would the case even have been brought if there had not been a drought?
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Criminal Liability of Employees under RCRA
U.S. v. Johnson & Towers, Inc., Jack W. Hopkins, and Peter Angel
741 F.2d 662 (1984)
SLOVITER, Circuit Judge
Before us is the government’s appeal from the dismissal of three counts of an indictment charging
unlawful disposal of hazardous wastes under the Resource Conservation and Recovery Act. In a question
of first impression regarding the statutory definition of “person,” the district court concluded that the
Act’s criminal penalty provision imposing fines and imprisonment could not apply to the individual
defendants. We will reverse.
The criminal prosecution in this case arose from the disposal of chemicals at a plant owned by Johnson &
Towers in Mount Laurel, New Jersey. In its operations the company, which repairs and overhauls large
motor vehicles, uses degreasers and other industrial chemicals that contain chemicals such as methylene
chloride and trichlorethylene, classified as “hazardous wastes” under the Resource Conservation and
Recovery Act (RCRA), 42 U.S.C. §§ 6901–6987 (1982) and “pollutants” under the Clean Water Act, 33
U.S.C. §§ 1251–1376 (1982). During the period relevant here, the waste chemicals from cleaning
operations were drained into a holding tank and, when the tank was full, pumped into a trench. The
trench flowed from the plant property into Parker’s Creek, a tributary of the Delaware River. Under
RCRA, generators of such wastes must obtain a permit for disposal from the Environmental Protection
Agency (E.P.A.). The E.P.A. had neither issued nor received an application for a permit for Johnson &
Towers’ operations.
The indictment named as defendants Johnson & Towers and two of its employees, Jack Hopkins, a
foreman, and Peter Angel, the service manager in the trucking department. According to the indictment,
over a three-day period federal agents saw workers pump waste from the tank into the trench, and on the
third day observed toxic chemicals flowing into the creek.
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Count 1 of the indictment charged all three defendants with conspiracy under 18 U.S.C. § 371 (1982).
Counts 2, 3, and 4 alleged violations under the RCRA criminal provision, 42 U.S.C. § 6928(d) (1982).
Count 5 alleged a violation of the criminal provision of the Clean Water Act, 33 U.S.C. § 1319(c) (1982).
Each substantive count also charged the individual defendants as aiders and abettors under 18 U.S.C. § 2
(1982).
The counts under RCRA charged that the defendants “did knowingly treat, store, and dispose of, and did
cause to be treated, stored and disposed of hazardous wastes without having obtained a permit…in that
the defendants discharged, deposited, injected, dumped, spilled, leaked and placed degreasers…into the
trench.…” The indictment alleged that both Angel and Hopkins “managed, supervised and directed a
substantial portion of Johnson & Towers’ operations…including those related to the treatment, storage
and disposal of the hazardous wastes and pollutants” and that the chemicals were discharged by “the
defendants and others at their direction.” The indictment did not otherwise detail Hopkins’ and Angel’s
activities or responsibilities.
Johnson & Towers pled guilty to the RCRA counts. Hopkins and Angel pled not guilty, and then moved to
dismiss counts 2, 3, and 4. The court concluded that the RCRA criminal provision applies only to “owners
and operators,” i.e., those obligated under the statute to obtain a permit. Since neither Hopkins nor Angel
was an “owner” or “operator,” the district court granted the motion as to the RCRA charges but held that
the individuals could be liable on these three counts under 18 U.S.C. § 2 for aiding and abetting. The court
denied the government’s motion for reconsideration, and the government appealed to this court under 18
U.S.C. § 3731 (1982).
* * *
The single issue in this appeal is whether the individual defendants are subject to prosecution under
RCRA’s criminal provision, which applies to:
any person who—
.…
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(2) knowingly treats, stores, or disposes of any hazardous waste identified or listed under this subchapter
either—
(A) without having obtained a permit under section 6925 of this title…or
(B) in knowing violation of any material condition or requirement of such permit.
42 U.S.C. § 6928(d) (emphasis added). The permit provision in section 6925, referred to in section
6928(d), requires “each person owning or operating a facility for the treatment, storage, or disposal of
hazardous waste identified or listed under this subchapter to have a permit” from the E.P.A.
The parties offer contrary interpretations of section 6928(d)(2)(A). Defendants consider it an
administrative enforcement mechanism, applying only to those who come within section 6925 and fail to
comply; the government reads it as penalizing anyone who handles hazardous waste without a permit or
in violation of a permit. Neither party has cited another case, nor have we found one, considering the
application of this criminal provision to an individual other than an owner or operator.
As in any statutory analysis, we are obliged first to look to the language and then, if needed, attempt to
divine Congress’ specific intent with respect to the issue.
First, “person” is defined in the statute as “an individual, trust, firm, joint stock company, corporation
(including a government corporation), partnership, association, State, municipality, commission, political
subdivision of a State, or any interstate body.” 42 U.S.C. § 6903(15) (1982). Had Congress meant in
section 6928(d)(2)(A) to take aim more narrowly, it could have used more narrow language. Since it did
not, we attribute to “any person” the definition given the term in section 6903(15).
Second, under the plain language of the statute the only explicit basis for exoneration is the existence of a
permit covering the action. Nothing in the language of the statute suggests that we should infer another
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provision exonerating persons who knowingly treat, store or dispose of hazardous waste but are not
owners or operators.
Finally, though the result may appear harsh, it is well established that criminal penalties attached to
regulatory statutes intended to protect public health, in contrast to statutes based on common law crimes,
are to be construed to effectuate the regulatory purpose.
* * *
Congress enacted RCRA in 1976 as a “cradle-to-grave” regulatory scheme for toxic materials, providing
“nationwide protection against the dangers of improper hazardous waste disposal.” H.R. Rep. No. 1491,
94th Cong., 2d Sess. 11, reprinted in 1976 U.S. Code Cong. & Ad. News 6238, 6249. RCRA was enacted to
provide “a multifaceted approach toward solving the problems associated with the 3–4 billion tons of
discarded materials generated each year, and the problems resulting from the anticipated 8% annual
increase in the volume of such waste.” Id. at 2, 1976 U.S. Code Cong. & Ad. News at 6239. The committee
reports accompanying legislative consideration of RCRA contain numerous statements evincing the
Congressional view that improper disposal of toxic materials was a serious national problem.
The original statute made knowing disposal (but not treatment or storage) of such waste without a permit
a misdemeanor. Amendments in 1978 and 1980 expanded the criminal provision to cover treatment and
storage and made violation of section 6928 a felony. The fact that Congress amended the statute twice to
broaden the scope of its substantive provisions and enhance the penalty is a strong indication of Congress’
increasing concern about the seriousness of the prohibited conduct.
We conclude that in RCRA, no less than in the Food and Drugs Act, Congress endeavored to control
hazards that, “in the circumstances of modern industrialism, are largely beyond self-protection.” United
States v. Dotterweich, 320 U.S. at 280. It would undercut the purposes of the legislation to limit the class
of potential defendants to owners and operators when others also bear responsibility for handling
regulated materials. The phrase “without having obtained a permitunder section 6925” (emphasis added)
merely references the section under which the permit is required and exempts from prosecution under
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section 6928(d)(2)(A) anyone who has obtained a permit; we conclude that it has no other limiting effect.
Therefore we reject the district court’s construction limiting the substantive criminal provision by
confining “any person” in section 6928(d)(2)(A) to owners and operators of facilities that store, treat or
dispose of hazardous waste, as an unduly narrow view of both the statutory language and the
congressional intent.
CASE QUESTIONS
1. The district court (trial court) accepted the individual defendants’ argument. What
was that argument?
2. On what reasoning did the appellate court reject that argument?
3. If employees of a company that is violating the RCRA carry out disposal of hazardous
substances in violation of the RCRA, they would presumably lose their jobs if they
didn’t. What is the moral justification for applying criminal penalties to such
employees (such as Hopkins and Angel)?
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24.7 Summary and Exercises
Summary
An estate is an interest in real property; it is the degree to which a thing is owned. Freehold estates are
those with an uncertain duration; leaseholds are estates due to expire at a definite time. A present estate is
one that is currently owned; a future estate is one that is owned now but not yet available for use.
Present estates are (1) the fee simple absolute; (2) the fee simple defeasible, which itself may be divided
into three types, and (3) the life estate.
Future estates are generally of two types: reversion and remainder. A reversion arises whenever a
transferred estate will endure for a shorter time than that originally owned by the transferor. A remainder
interest arises when the transferor gives the reversion interest to someone else.
Use of air, earth, and water are the major rights incident to ownership of real property. Traditionally, the
owner held “up to the sky” and “down to the depths,” but these rules have been modified to balance
competing rights in a modern economy. The law governing water rights varies with the states; in general,
the eastern states with more plentiful water have adopted either the natural flow doctrine or the
reasonable use doctrine of riparian rights, giving those who live along a waterway certain rights to use the
water. By contrast, western states have tended to apply the prior appropriation doctrine, which holds that
first in time is first in right, even if those downstream are disadvantaged.
An easement is an interest in land—created by express agreement, prior use, or necessity—that permits
one person to make use of another’s estate. An affirmative easement gives one person the right to use
another’s land; a negative easement prevents the owner from using his land in a way that will affect
another person’s land. In understanding easement law, the important distinctions are between easements
appurtenant and in gross, and between dominant and servient owners.
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The law not only defines the nature of the property interest but also regulates land use. Tort law regulates
land use by imposing liability for (1) activities that affect those off the land and (2) injuries caused to
people who enter it. The two most important theories relating to the former are nuisance and trespass.
With respect to the latter, the common law confusingly distinguishes among trespassers, licensees, and
invitees. Some states are moving away from the perplexing and rigid rules of the past and simply require
owners to maintain their property in a reasonably safe condition.
Land use may also be regulated by private agreement through the restrictive covenant, an agreement that
“runs with the land” and that will be binding on any subsequent owner. Land use is also regulated by the
government’s power under eminent domain to take private land for public purposes (upon payment of
just compensation), through zoning laws, and through recently enacted environmental statutes, including
the National Environmental Policy Act and laws governing air, water, treatment of hazardous wastes, and
chemicals.
EXERCISES
1. Dorothy deeded an acre of real estate that she owns to George for the life of
Benny and then to Ernie. Describe the property interests of George, Benny, Ernie,
and Dorothy.
2. In Exercise 1, assume that George moves into a house on the property. During a
tornado, the roof is destroyed and a window is smashed. Who is responsible for
repairing the roof and window? Why?
3. Dennis likes to spend his weekends in his backyard, shooting his rifle across his
neighbor’s yard. If Dennis never sets foot on his neighbor’s property, and if the
bullets strike neither persons nor property, has he violated the legal rights of the
neighbor? Explain.
4. Dennis also drills an oil well in his backyard. He “slant drills” the well; that is, the
well slants from a point on the surface in his yard to a point four hundred feet
beneath the surface of his neighbor’s yard. Dennis has slanted the drilling in order
to capture his neighbor’s oil. Can he do this legally? Explain.
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5. Wanda is in charge of acquisitions for her company. Realizing that water is
important to company operations, Wanda buys a plant site on a river, and the
company builds a plant that uses all of the river water. Downstream owners bring
suit to stop the company from using any water. What is the result? Why?
6. Sunny decides to build a solar home. Before beginning construction, she wants to
establish the legal right to prevent her neighbors from constructing buildings that
will block the sunlight. She has heard that the law distinguishes between licenses
and easements, easements appurtenant and in gross, and affirmative and negative
easements. Which of these interests would you recommend for Sunny? Why?
SELF-TEST QUESTIONS
1. A freehold estate is defined as an estate
a. with an uncertain duration
b. due to expire at a definite time
c. owned now but not yet available for use
d. that is leased or rented
A fee simple defeasible is a type of
a. present estate
b. future estate
c. life estate
d. leasehold estate
A reversion is
a. a present estate that prevents transfer of land out of the family
b. a form of life estate
c. a future estate that arises when the estate transferred has a
duration less than that originally owned by the transferor
d. identical to a remainder interest
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An easement is an interest in land that may be created by
a. express agreement
b. prior use
c. necessity
d. all of the above
The prior appropriation doctrine
a. tends to be applied by eastern states
b. holds that first in time is first in right
c. gives those that live along a waterway special rights to use the
water
d. all of the above
SELF-TEST ANSWERS
1. a
2. a
3. c
4. d
5. b
