2. The Abolition of Privity

Most modern products liability lawsuits claim a breach of warranty. A warranty is a representation, or promise (warrant) by the manufacturer or seller that the product meets certain specifications of performance and/or safety – a guarantee.

Under the early common law in both England and the United States, warranty coverage was limited to persons in privity with the manufacturer or seller. That is to say, a person injured by a defective product was limited to suing the party from whom the product was purchased. [29] The logic for this limitation was:

...there must be a fixed and definite limitation to the liability of manufacturers and vendors for negligence in the construction and sale of complicated machines and structures which are to be operated or used by the intelligent and the ignorant, the skillful and the incompetent, the watchful and the careless, parties that cannot be known to the manufacturers or vendors, and who use the articles all over the country hundreds of miles distant from the place of their manufacture or original sale... [30]

This rule allowed manufacturers to maintain some degree of control over the warranty that was sold with their products. They could be certain, for example, that the buyer was warned of the proper uses, or trained in the operation of the machine. They were also better able to keep track of potential claimants, and thus better able to monitor their own risk exposure. It was a doctrine based on contract, on agreement between buyer and seller, and it allowed manufacturers and their insurers to control and predict risk.

In a modern industrial economy, however, the privity rule often makes no sense. Unlike earlier craftsmen, in the modern economy manufacturers typically put products into a broad market through middlemen, who sell the product to the general public without alteration or interim use (indeed, with many pre-packaged goods, use or testing by the distributor is impossible). In such an economy, it is often unfair to restrict a manufacturer’s warranty to the immediate purchaser (the retailer), for as Justice Benjamin Cardozo correctly noted in the first U.S. case to broadly strike down the privity rule, "The dealer was indeed the one person of whom it might be said with some approach to certainty that by him the [product] would not be used." [31]

Once Cardozo’s opinion in MacPherson v. Buick broke the ice, the states rapidly began to abandon the privity requirement in all warranty cases. Michigan was one of the last states to do so, in 1958. [32]

Even after abolishing the privity requirement, only a buyer or user could recover from the manufacturer on a warranty theory. A person injured by a product who was not a buyer or user could only sue the manufacturer under traditional tort law, which required a finding of negligence. However, Michigan soon after became the first state to push the removal of the privity requirement to the point where a person who was neither a buyer nor even a user of the product was able to recover under a warranty theory.

The case was Piercefield v. Remington Arms Co., Inc. [33] Piercefield was a bystander who was injured when a cartridge manufactured by Remington, and purchased and shot by a third person, caused a gun to explode. After Piercefield, essentially any person injured by any defective product could sue the manufacturer directly under a warranty theory, meaning no showing of negligence was required.

The abolition of the privity requirement was, for the most part, a very positive development in law. It recognized that a consumer who buys, say, an RCA television at an appliance store has a warranty contract with RCA, not the store. But it was not an unqualified good, for many chose to interpret the new rule as denying consumers and manufacturers the right to contractually allocate risk.

If warranty is taken out of its contractual context, then manufacturers and insurers lose the control and predictability contract gives to the risks involved. At the other end of the transaction, the buyer’s incentive to learn about the product and to use it correctly are reduced – the moral hazard problem.

Further, in a few cases – but often those generating substantial litigation – the requirement of privity may not be outdated. One such example would be Agent Orange, the defoliant used by the Army in Vietnam and later linked to various ailments in veterans. Here the Army had complete control of the product, and was in as strong a position as the manufacturer to determine any ill side effects of the product, as well as to decided how to use it. Further, it is fair to say that few, if any, veterans truly thought it was the manufacturer’s duty to protect them in Vietnam – they looked to the Army. A similar case might be made for asbestos manufacturers.

Removing the privity requirement makes sense when dealing with pre-packaged goods over which the retail merchant has little or no real control. However, its removal has made it extremely difficult for manufacturers to control their liability, since they can be held liable even when intervening parties may have had considerable control over the product, including, for example, having it serviced, or using it improperly, etc. Its removal has all but infinitely increased the number of potential plaintiffs to whom each manufacturer is liable, adding to the difficulty of predicting and controlling liability.

Abolishing the privity requirement removed a serious obstacle to tort recovery for damages caused by defective products. But it raised problems for insurance markets, and the courts had nothing to put in privity’s place to solve these problems.