LETTER

June/July 2005 , Special Edition Special Issue
Copyright Awards

In order to keep you abreast of recent developments in the law, Saunders & Schmieler's S&S Recent Developments in the Law reports on the significance of current decisions of major import in the jurisdictions of Maryland, the District of Columbia, Virginia, and the federal Fourth Circuit.

This material is being provided for your general information only, and is not a substitute for obtaining legal advice. The information provided is not provided as legal advice, or in the course of an attorney-client relationship. You should always consult an attorney for advice about the specific circumstances of your case.

Recent Developments in the Law

Jeffrey R. Schmieler, Esquire
Saunders & Schmieler, P.C.
8737 Colesville Road
Suite L-200
Silver Spring, Maryland 20910
(301) 588-7717
www.sslawfirm.com

© Saunders & Schmieler, P.C. 2003

MARYLAND COURT OF
APPEALS

PRODUCTS LIABILITY &
WARNING LABELS

Failure to heed conspicuously placed warning labels on recessed lighting fixture, thereby allowing insulation to be installed too close to fixture, was proximate cause of fire resulting from fixture overheating;
Lightolier v. Hoon, 2005 WL 1429857 (June 21, 2005).

Case Summary: The Hoons, homeowners in Chestertown, MD, during the course of home renovations, had several non-IC rated recessed light fixtures installed, one of which later overheated, causing a fire, after insulation was installed closer to the fixture than the fixture's manufacturer indicated was acceptable. Ordinarily, recessed lighting fixtures are available in 2 categories: IC-rated fixtures may be used in insulated ceilings where the fixture will come into direct contact with insulation; non-IC rated fixtures are not intended for contact with insulation. The fixture at issue in this case bore a warning sticker that read "Do not install insulation within 3 inches of fixture sides or wiring compartment nor above fixture in such a manner to entrap heat." An identical warning was included on the first page of the instruction manual included with the fixture. In addition to these warnings, the fixture in question included a "self-heating thermal protector," or SHTP, a device "designed to detect excessive heat entrapped around the fixture and to 'open' a small circuit . . . causing the . . . current to the fixture to be cut off" if the fixture becomes too hot. The SHTP does not cause the fixture permanently to turn off, but rather, causes the light temporarily to turn off if the fixture's temperature exceeds the safe limit, turning the light back on once the temperature diminishes.

The Hoons had several non-IC rated fixtures installed on the first floor of their home, two of which began to blink, indicating SHTP activation, some time after the Hoons had cellulose insulation blown into the ceiling surrounding the fixtures. Upon investigation, the blinking fixtures were found to be too close to insulation, which was removed. The fixture that ultimately caused the fire, though, was never inspected because it never began blinking.

After the fire, the Hoons sued the fixture's manufacturer as well as the insulation installer, attempting to recover for property damage caused by the fire. At the trial court, summary judgment was granted for the fixture's manufacturer because the Hoons failed to follow the warning labels on the fixture, and also failed to investigate all of their non-IC rated fixtures after noticing problems with two of the fixtures. The Hoons appealed this decision, and the intermediate court reversed it, finding that the fixture manufacturer might have been negligent in the design or manufacture of the SHTP.

At the Court of Appeals, the highest court in Maryland, the fixture manufacturer argued that the facts developed in the case indicated that the Hoons had misused the non-IC rated fixture and thus, the manufacturer could not be held liable for damage resulting from misuse. The Court, considering this argument, first noted that sellers of products are generally liable if the product is sold in a defective condition and is thus unreasonably dangerous to the user or consumer. Sellers may rely on a number of defenses to such general liability, including the possibility that the consumer's injury is the result of "abnormal handling or use of the product," or where "warnings or instructions supplied with the product are disregarded by the consumer where, if used in accordance with these warnings, the product would be safe."

The court mentioned an earlier case involving a child's fatal shooting with an unsecured handgun, observing that because the handgun's owner's manual expressly warned against storing firearms without locking them or in places where children or careless adults could access them, the child's father's act of storing the gun in a mattress was clearly in contravention of the express warnings from the manual, thus constituting misuse of the handgun. By analogy, it was a misuse of the Lightolier fixture for the Hoons to have blown-in insulation installed around the fixture "without taking adequate steps to ensure that the insulation installers heeded the warnings relating to the fixture[]." Additionally, Lightolier asserted that even in a non-misuse context, the existence of clear warnings on a product may also serve to bar strict liability actions.

Citing an earlier case, the Court stated that "If a product otherwise unreasonably dangerous can be made safe for reasonably foreseeable uses by adequate warnings or instructions, liability will be avoided, and the focus in such cases is generally upon the adequacy of the notice. If the warnings or instructions are adequate the product is not defective, and the plaintiff cannot recover under a theory of strict liability in tort. The cause of the injury in such cases is the failure to read or follow the adequate warnings or instructions, and not a defective product." Thus, failure on the part of the consumer to follow a product's warnings and instructions can exist alongside misuse of the product as separate defenses to product liability allegations. Supporting this statement, the Court looked back to an intermediate appellate court case where the manufacturer of a gasoline canister was sued in products liability. The canister bore clear warnings that it should not be stored inside a vehicle or living space, nor should children be allowed access to it; nevertheless, the plaintiff had stored the (full) canister in the basement of his home and later, two unsupervised children spilled some of the gasoline while playing with the canister, causing a fire that killed one of the children and severely burned the other. In that case, the presence of warning labels on two of the canister's four sides led the court to conclude that the manufacturer provided adequate warnings that went unheeded, and that the product was not in a defective condition or unreasonably dangerous.

One issue associated with the warning label defense is the clarity of the warnings, themselves. A generalized warning "might not warn at all," but in the case of Lightolier, the Court found the warning labels on the light fixture as well as the warnings in the instruction manual to be "unquestionably clear and adequate" to alert the consumer of the risk of fire if the fixture were placed within three inches of thermal insulation. One way of determining the adequateness of warning is to gauge the manufacturer's "adherence to industry-wide standards and practices." Here, Lightolier's warnings were substantially similar to the language found in the National Electric Code (NEC), a "model code promulgated by the National Fire Protection Association." The Court was satisfied that Lightolier's warnings were sufficiently clear.

The last matter the Court needed to dispatch was the SHTP and whether its failure, when surrounded by thermal insulation, was a proximate cause of the fire. The Court turned again to the NEC, which described an industry practice of locating SHTPs away from the source of heat, in order to reduce the risk of "nuisance tripping." Thus, the Hoons' argument that the SHTP was improperly placed appeared untenable, especially because the SHTPs in two other units in the Hoons' home functioned properly. To the Court, this showed that the sole proximate cause of the fire was the improper placement of thermal insulation in close proximity to the non-IC fixture.

Three judges dissented from the Court's holding; they argued that the Court improperly downplayed the failure of the SHTP. These judges felt that, because there was conflicting evidence about the adequacy of the SHTP's design, it would have been appropriate for a jury to determine whether the device was deficient and, if so, whether the deficiency was at least one proximate cause of the fire.

MARYLAND'S NEW
APPROACH FAVORS
MANUFACTURERS
WHO INCLUDE
CONSPICUOUS AND
SPECIFIC WARNINGS
ON POTENTIALLY
DANGEROUS
PRODUCTS

Commentary: This case serves as a ringing endorsement of the use of conspicuous and clear warnings on manufactured products. This case clearly outlines the separation of two defenses to product liability suits: the misuse defense and the failure to follow warnings and instructions defense.

The misuse defense turns on the court's cautious evaluation of a reasonably foreseeable use of the product; if the product was used in a way not reasonably foreseeable to the manufacturer, the manufacturer should not be held strictly liable for any resulting injury or damage. The Court does not provide guidance on how to measure that kind of foreseeability, but suggests that without careful application, manufacturers would become insurers for every injury that might result from their products.

The failure to follow warnings and instructions defense is a different matter; the Court's language suggests that, as long as a warning is not overly general and is placed in a conspicuous location, the consumer's failure to heed the warning should serve as a defense for the product's manufacturer. Of note in the Court's opinion is its quotation of comment j of Section 402A of the Restatement (Second) of Torts; the comment states that "[w]here warning is given, the seller may reasonably assume that it will be read and heeded; and a product bearing such a warning, which is safe for use if it is followed, is not in defective condition, nor is it unreasonably dangerous." By quoting this language, the Court endorses its use in future cases, providing a strong legal shield for manufacturers who follow the Restatement's guidance. The Court's application of the Restatement is also instructive: where manufacturers' warnings rely on the text of a clear statement of industry or expert practice, those warnings will likely be afforded deference by the courts in Maryland.

The dissent felt that summary judgment was inappropriate in this case because there was conflicting evidence regarding the sufficiency of design of Lightolier's SHTP. According to the dissent, if the SHTP "worked as it was intended to work, as it should have worked, and as it was required to work by the National Electric Code, the fire may not have occurred." This statement ignores the intervening actions of the insulation installer, as well as the intervening failure by the Hoons to check the insulation around all their fixtures after two fixtures' SHTPs were triggered.

There is always some balance that must be struck between holding manufacturers of products liable for obvious defects and allowing the losses to stay where they fall when consumers misuse products or fail to follow applicable warnings and instructions. The majority in this holding properly places responsibility on the consumer who disregards a clear warning about the danger of misusing a product, while the dissent would have product manufacturers veritably serving as insurers for every use of their product.

The holding in this case stands in contrast with the District of Columbia's products liability law, particularly with regard to the use of warnings on products. The distinction is founded on the Maryland court's use of comment J to Section 402, of the Restatement (Second) of Torts: "[w]here warning is given, the seller may reasonably assume that it will be read and heeded; and a product bearing such a warning, which is safe for use if it is followed, is not in defective condition, nor is it unreasonably dangerous." (emphasis added) This approach has not been adopted, indeed has been sidestepped by D.C. courts. In D.C., courts conduct a kind of balancing test where a warning is only one of a product's design attributes used to measure the product's danger against its utility. Such balancing is conducted by juries in D.C., rather than by judges at the summary judgment stage. The U.S. Court of Appeals for the D.C. Circuit explained that if the sufficiency of the warning were the only issue, the "warning" defense would essentially trump all other factors in the danger vs. utility balancing test, an impermissible result according to established D.C. precedent.

In cases where choice of law issues are prominent and the law of Maryland or D.C. might apply, manufacturers sued for products liability claims, where the product at issue features a prominent warning, should argue that Maryland law should govern the suits brought against them. This is so because in Maryland, after the holding in Lightolier discussed above, manufacturers sued in product liability cases may be able to have their cases dismissed at the summary judgment stage, rather than having to go through the extra time and expense -- and attendant risks -- of preparing a case for trial and submitting it to a jury.

Lightolier is an important development in Maryland products liability law and serves as an endorsement of the practice of including clear and relevant warnings on manufactured products.

MARYLAND COURT OF
SPECIAL APPEALS

ENFORCEMENT OF
SETTLEMENT
AGREEMENTS

Damages Stipulation in Lawsuit Settlement Agreement Upheld; Stipulation was Neither an Unenforceable Penalty nor Unreasonable Liquidated Damages:
Sysco v. Harrell, 2005 WL 1211865 (Md. Ct. App. June 2,

Case Summary: Harrell, the plaintiff, was a SYSCO truck driver who filed race discrimination, labor complaints, and workers' compensation claims against SYSCO. After both Harrell and SYSCO consulted counsel, the parties agreed to a "global" settlement to dispose of any pending and potential claims involving Harrell and SYSCO; this settlement was submitted to the Workers' Compensation Commission, which approved it on August 31, 2001. One of the terms to which Harrell agreed was that he would not do anything to disparage the company and the company would not disparage him; the provision provided that it was a material provision of the Agreement and "breach . . . will support a cause of action for breach of contract . . . and will entitle the aggrieved parties to recover damages . . . including, but not limited to, the recovery of any payments made" pursuant to any portion of the Agreement. The provision also indicated that it was not a penalty and that damages set forth in the paragraph were "fair and reasonable in light of the difficulty of proving prejudice to the Company in the event of such breach."

According to the Court of Special Appeals, shortly after Harrell executed the Agreement and accepted full payment of its $185,000 award, he wrote a letter to a SYSCO shop steward on behalf of another SYSCO employee. The letter detailed alleged discrimination and sexual harassment experienced by Harrell and his colleague. When Harrell's colleague filed a racial discrimination complaint against SYSCO at the Maryland Commission on Human Relations, SYSCO received a copy of Harrell's letter. SYSCO then filed suit against Harrell, alleging that he had violated his covenants not to disparage the company and not to assist third parties in their grievances against the company.

The Circuit Court concluded that SYSCO's claim that Harrell should return the $185,000 settlement payment was unreasonable because $185,000 in liquidated damages for disparagement "smacks directly of a penalty for breaching the agreement."

On appeal, SYSCO argued that the damages clause at issue was an appropriate "stipulated" damages provision. The Court of Special Appeals found that the provision was not a liquidated damages provision, nor was it a penalty, but that it was enforceable.

STIPULATED DAMAGES
CLAUSE IN SETTLEMENT
AGREEMENT ENFORCED;
COURT ALLOWS
RECOVERY OF
SETTLEMENT PAYMENT
FOR BREACH OF
MATERIAL TERMS OF
SETTLEMENT

Liquidated damages refer to a "specific sum of money . . . expressly stipulated by the parties to a . . . contract as the amount of damages to be recovered by either party for a breach of the agreement by the other." To determine whether a liquidated damages clause is enforceable, courts consider three factors: (1) whether the provision includes clear and unambiguous language providing for a 'certain sum,' (2) whether the provision provides for stipulated damages that represent reasonable compensation for the damages anticipated from the breach, measured prospectively at the time of the contract rather than in hindsight at the time of the breach; and (3) a mandatory binding agreement before the fact which may not be altered to correspond to actual damages determined after the fact.

The Circuit Court found that the second factor was not satisfied by the SYSCO-Harrell agreement, i.e. that the damages were unreasonable, and thus, the provision was not an enforceable liquidated damages clause. The Court of Special Appeals determined that the clause was unenforceable as liquidated damages because the first and third factors were not satisfied by the SYSCO-Harrell agreement. As to the first factor, the agreement did not include clear language about a certain sum, and as to the third factor, the agreement allowed some room to determine damages after the fact, rather than before the fact. The appellate court concluded that Harrell and SYSCO had selected the "same type of post hoc yardstick that traditionally has been used to measure actual or 'unliquidated' damages." In other words, the parties broadly agreed that recoverable damages flowing from a potential breach of the Agreement would include the settlement payments - but would not be limited to the settlement payments. Significantly, the agreement did not set a "ceiling" for damages, but set out a non-exclusive list of possible damages, a list which happened to include the settlement payments.

After concluding that the provision was not a liquidated damages provision, the court was then faced with the question of whether it was subject to a "reasonableness" requirement, or some other (lower) standard for measuring its enforceability. The court concluded that, even if the standard were one of reasonableness, the agreement would be enforceable.

As conclusive evidence of reasonableness, the court turned to the language and circumstances surrounding the settlement agreement. Those circumstances included the nature of Harrell's complaints against SYSCO as well as the acknowledgment by Harrell and SYSCO that it would be difficult for SYSCO to show a dollar amount for prejudice caused by any breach of the settlement. The court wrote that it was particularly important that "[w]hat SYSCO bought through the negotiated settlement . . . was immediate and long-term 'peace' with Harrell." If the court had not upheld the damages provision, it would have "effectively immunized Harrell from the consequences of deliberately breaching his obligations under the Settlement Agreement." Rather than viewing the provision as a penalty, the court saw "nothing unreasonable about such a clearly understood and expressed quid pro quo." Importantly, if such an agreement is not enforced, then (quoting language supplied by SYSCO), "no employer should consider a settlement in these types of cases because it will likely be left without adequate redress in the event of a breach."

Another factor the court considered was the fact that the settlement was concluded at "arm's length" and with the assistance of independent counsel for both parties. The damage remedy outlined in the settlement agreement was clearly bargained-for and free of indicia of fraud, coercion, or other aspects of unconscionability, and thus, the court concluded it was enforceable. As a last matter, the court indicated that if SYSCO could prove actual damages beyond the settlement payment sum, the company might have been entitled to recover those damages. But because SYSCO had failed at trial to offer evidence that its loss was anything other than the settlement sum, and because SYSCO had conceded that it had no ability to prove such damages, the court held that SYSCO was not entitled to a new trial on the issue of actual damages.

Commentary & Pointers: This case is immensely noteworthy for the way it treats damages provisions in a settlement agreement. The Court of Special Appeals' decision in this matter gives teeth to settlement agreements, allowing the parties who pay settlements to be certain that the sums they concede will truly serve as "peace money," resolving a claim once and for all.

Under circumstances like those present in this case, a stipulated damage provision "including, but not limited to, the recovery of any payments" made pursuant to the settlement agreement is enforceable, and such provisions should be included in every settlement agreement, but especially in agreements that resolve disputes where it would be difficult to quantify damages in the event that the settlement agreement is breached. In SYSCO, the fact that Harrell's actions led to disparagement, an injury for which damages are not easily quantified, made the court's decision to uphold this award much easier; if damages could have been calculated more easily by some other method, the court might have reached a different conclusion on the enforceability of this provision.

One of the most important aspects of the court's decision is its emphasis on the process of negotiating and agreeing upon the terms of the settlement. The court mentions the importance of both parties being represented by independent counsel, as well as the importance of the party whose claims are settled being given the opportunity to know and understand the terms of the agreement he signs. The court also cited several policy-driven reasons for upholding this provision. Quoting a case from 1879, the court observed that "it would be strange if, in the absence of clear evidence of fraud or mistake, the parties were not bound and concluded after what has taken place . . . ." After all, courts prefer that parties find resolution to their own disputes rather than resorting to litigation, and assuming a settlement to be fair in the negotiation, the court will have little cause to substitute its own judgment for the judgment of the parties as they negotiated their agreement.

The Circuit Court in this case concluded that Harrell's activities clearly constituted disparagement and aiding and assisting third-party claims against SYSCO, but saw no way that a disparagement of this nature could reasonably be said to cause $185,000 in damages to SYSCO. By letting the reasonableness standard go by the wayside, the Court of Appeals rightly focused on the intent of the parties, contracting freely, choosing the terms of their agreement and the assignation of penalties for any breach of the agreement. This begs the question of whether any settlement sum would have been treated the same way. If Harrell's claim had been settled for $25,000, would the court have decided differently? For $500,000? In other words, one open question is how future courts will approach the issue of reasonableness in a stipulated damages agreement like this one. The Circuit Court's approach was to require damages to be reasonable, and while the Court of Special Appeals concluded that, although reasonableness was not a prerequisite to enforcement of the agreement, the agreement was reasonable. Courts applying this precedent might see fit not to uphold stipulated damages by concluding that they are not reasonable in light of the procedures used in obtaining the agreement.

In the end, this case indicates that the employer looking to settle employee claims should include language like SYSCO's, making the settlement payment the "floor," rather than the "ceiling" for a potential damages award in the event the employee breaches the agreement. In order to avail themselves of this case's teaching, employers must also take care to negotiate settlements carefully, preserving every aspect of procedural fairness in bargaining.

At this juncture, it is unclear whether this decision will be appealed and, if it is, what outcome the Court of Appeals will determine is appropriate; thus, any reliance on this holding should be made with the understanding that this holding may be altered.