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Litigation Alert

Maryland Embraces "Unmanifested Defect" Claims for Potential Safety Defects

By Joel Dewey and Jeffrey Yeatman

Maryland's highest court has rejected the national trend and embraced products liability claims based on unmanifested latent defects.  In so doing, it has also limited the scope of the economic loss rule and authorized private actions for repair costs under the Consumer Protection Act.  The ramifications of this class action decision are vast.

In Lloyd v. General Motors Corp., 2007 WL 416367, issued February 8, 2007, the plaintiffs/appellants alleged that the seat backs of vehicles manufactured by General Motors, Ford, DaimlerChrysler, and Saturn from 1990 to 1999 were defective and unreasonably dangerous because of an alleged propensity to deform and collapse in moderate to severe rear impact accidents.  Plaintiffs sought the costs of repair or replacement of these alleged defects, on behalf of a putative class of all Maryland residents who owned these vehicles and whose vehicles explicitly had not experienced a seat back failure.

Plaintiffs’ claims were dismissed by the trial court on the grounds that plaintiffs had not alleged any injury or actual harm under Maryland tort or warranty law, and that plaintiffs' tort-based claims were barred by operation of the economic loss rule.  The Court of Special Appeals, Maryland's intermediate appellate court, affirmed that ruling.

The Court of Appeals reversed.  In a 65-page opinion that took more than four years to issue, the court held that plaintiffs could proceed on every theory asserted:  negligence, strict liability, breach of implied warranty of merchantability, negligent failure to disclose / negligent misrepresentation, fraudulent concealment / intentional failure to warn, unfair and deceptive trade practices under Maryland's Consumer Protection Act, and civil conspiracy.  (Read the opinion here.

Notably, the court justified its ruling for the tort-based claims under an exception to the economic loss rule.  It also invented a new pleading requirement for tort claims seeking to recover purely economic loss to remedy allegedly existing dangerous conditions, and expanded the coverage of the Consumer Protection Act to alleged safety defects without any requirement that such a defect manifest to be compensable.   

The Defect Is the Injury

In reaching all of these conclusions, the court rejected the national trend against "no injury" or "unmanifested defect" cases, and fully accepted the rationale that an alleged safety defect, in and of itself, constitutes a "compensable injury" both in tort and in contract.

Furthermore, given the court's  broad view of the scope of the Consumer Protection Act as applied to safety defects, and the measure of damages it authorizes, defendants can likely expect that enterprising plaintiffs lawyers will begin characterizing their products liability defect theories in Maryland as consumer protection act violations and seek repair and replacement damages for alleged defects.

The Exception that Swallowed the Rule:  Economic Loss Recoverable for "Grave" Safety Defects

Relying on a series of Maryland construction and asbestos cases, the court held that recovery in tort was authorized for the costs of correcting unmanifested safety defects notwithstanding the general bar on the recovery of such "economic losses" in tort. 

In so ruling, the court emphasized that the exception to the general rule applies where the risk at issue is for extremely serious injuries.  The court held that "in order to assert a cognizable products liability theory of recovery, an action sounding in tort, but one premised on economic losses alone, the plaintiff must allege facts that demonstrate that the product at issue creates a dangerous condition, one that gives rise to a clear danger of death or personal injury."  (Emphasis in original).

The court found such a risk in Lloyd, based on plaintiffs' averment that "individuals have suffered extremely serious injuries, including paraplegia, quadriplegia and/or death as a result of rear impact collisions in the class vehicles containing the allegedly defective seatbacks." 

Although prior Maryland precedent required a two-prong analysis balancing both the seriousness of the risk and the probability of occurrence, the court functionally eliminated the latter requirement, holding that "the fact that the severity of the potential injury is so grave, in this case, is sufficient to meet the threshold for the petitioners' recovery of economic losses even if the probability that the injuries would occur is not as high."  Thus, in cases involving allegations of risk of death, virtually no showing of the probability of injury is required to make out a claim of entitlement to corrective relief.

While the court claimed to still acknowledge the underlying rationale of the economic loss rule, a review of the application of the "exception" to claims premised on strict liability illustrates the expansive nature of the "exception."  The court's exception requires only a "dangerous condition" that creates "a clear danger of death or personal injury."  Notably, Maryland applies the Restatement (Second) of Torts § 402A articulation of strict liability, which authorizes recovery where a "product [is] in a defective condition" that is "unreasonably dangerous to the user or consumer." 

The test for strict liability and the test for the "exception" to the economic loss rule are virtually identical.  In fact, the court admitted as much when ruling that plaintiffs' could proceed with their strict liability claims in Lloyd:  "[A] plaintiff may overcome the ordinary rule that bars recovery for economic loss in tort claims so long as he or she asserts that there is a strong likelihood that the threatened damage is of a serious nature and it is reasonably probable that the damage will occur.  In other words, when the risk of serious injury or death and the likelihood of damage are great enough to reach the threshold [enumerated in this case], the cost to remedy the product defect stands in the place of actual physical injury." 

That is, the court's “exception” to the economic loss rule is no exception at all. It is the obliteration of the rule.  For any defect that could be characterized as a safety defect—particularly, any defect that could satisfy the requirements of strict liability under § 402A, “defective” and “unreasonably dangerous”—the “exception” to the economic loss rule will always apply.  This is a sweeping change that may make it much easier for plaintiffs to bring product defect class actions in Maryland.  It would be the rare strict liability claim that could fail to satisfy the test for the "exception" articulated by the Court.

New Pleading Requirements:  "Empirical or Anecdotal Evidence" at the Complaint Stage Required

Throughout the Lloyd opinion, the court placed great emphasis on the complaint's allegations that "thousands of individuals have been injured or killed as a result of the collapse of the class vehicle seat backs in rear-end collisions."  (In fact, the complaint only alleged that "[e]ach year, more than a thousand people die and many thousands more are injured in rear-impact motor vehicle collisions in the U.S.  Some of these people are Maryland residents."  The closest the complaint came to quantifying the number of individuals injured by the specific defect at issue in the case was the statement that the alleged defect "has resulted in significant numbers of serious injuries.").  The court also relied heavily on "specific records of complaints made to the National Highway Traffic Safety Administration (NHTSA), in which drivers of class cars experienced the collapsed of seatbacks in rear-end collisions resulting in no less than 38 reported injuries and 3 fatalities." 

Thus, the unfiltered complaints made to NHTSA through VOQ entries were elevated to the status of "empirical or anecdotal evidence of actual injuries resulting from the defective seatbacks[.]"  The court went so far as to state that, without this "evidence," it "would likely determine that the petitioners had not articulated a sufficient injury to withstand dismissal of their claims."  The court also purported to distinguish other out-of-state authority questioning the viability of similar unmanifested defect theories on the basis that "there was no discussion of whether the plaintiffs submitted any objective facts that a significant number of others had been injured or harmed as a result of the product defect."

The requirement of a specific showing of "empirical or anecdotal evidence" to sustain a claim at the motion to dismiss stage is a novel development for Maryland civil procedure.  However, based on the foregoing language, defendants in Maryland faced with unmanifested defect claims for economic loss could seek the dismissal of those claims if they are not supported by at least some quantity of "evidence" equivalent to that presented in Lloyd.

The Consumer Protection Act:  Where "Actual Harm" Means "Potential, Unmanifested Defect"

Maryland has for years maintained a bright-line distinction between public and private enforcement actions brought under its Consumer Protection Act.  Public actions require no showing of actual harm or deception, but are the exclusive province of the State Attorney General and the Consumer Protection Division. 

A private right of action for damages also existed, but it required a showing of "actual harm" from the prohibited practice, under the rationale that the private enforcement action was intended to be purely compensatory for injuries actually suffered, and not a means to commission private attorneys general to police Maryland businesses. 

Notwithstanding this longstanding "actual harm" requirement, the court in Lloyd authorized the recovery of replacement or repair damages for unmanifested defects, accepting the rationale that the defect is the injury.  The court held that "as a result of the respondents' misrepresentation or omission, [plaintiffs] suffered a loss, measured by the amount it will cost them to repair the defective seatbacks."  (Notably, this definition of "actual harm" is also the articulation of the measure of damages under UCC § 2-714 for a breach of warranty.  Thus, the court's ruling would appear to support the argument that warranty law and the Consumer Protection Act provide co-extensive relief, but with attorneys’ fees recoverable under the Consumer Protection Act.)

The potential long-term effect of this holding could be vast.  The court’s discussion of the Consumer Protection Act theory would appear to support transforming a run-of-the-mill breach of warranty claim into a Consumer Protection Act claim.  The measure of damages for breach of warranty is adopted as the proof of “actual injury” for CPA purposes. The court has eliminated the “actual harm” requirement from the CPA for any claim premised on a product safety defect.  Characterizing the defect itself as the harm is a sweeping change, declaring that any claimant possessing a defective product is inherently entitled to repair or replacement damages.   Again, this is a radical departure from prior law. 

The Lloyd opinion is one of enormous scope and significance.  In sum, the case has the potential to turn Maryland into a magnet for the many "no injury" or "unmanifested defect" classes that have been pursued, often without success, in many other jurisdictions.  Indeed, we are aware of at least one other copycat class action that has already been filed in Maryland parroting similar theories of recovery. Manufacturers and other sellers should familiarize themselves with this opinion, in order to prepare for the increased litigation it is likely to engender.


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