Explore the complexities of managing product liability risks in M&A transactions. This blog post discusses a case involving an asset acquisition, product liability claims, and the buyer’s defense against successor liability. Learn about the court’s ruling and the implications for similar scenarios.
M&A Stories
October 28, 2020
Introduction:
Managing product liability risks during a company acquisition, especially involving a business with a history of product liability claims, is a critical concern. This holds true even in cases of asset acquisitions.
The Deal:
In November 2017, a company acquired the assets of another business that produced and sold an intrauterine device. This contraceptive was a T-shaped device wound with copper, designed to prevent pregnancy. The selling company had a track record of facing product liability claims. Despite this, the buyer did not assume any responsibility for injuries caused by the seller’s device before the asset purchase agreement was finalized.
The Lawsuit:
A claimant had the seller’s device implanted in 2010 and removed in 2016. During the removal process, a part of the device broke off and got embedded in the claimant’s uterus lining. Attempts to remove the embedded part surgically were unsuccessful, and the claimant’s doctor advised her to leave it in place. In response, the claimant initiated a lawsuit against multiple parties, including both the buyer and the seller. The case was heard in a Houston federal district court.
The Buyer’s Defense:
The buyer contested the claim against it by asserting that it had not manufactured or sold the device. According to the buyer’s argument, it couldn’t be held liable for the injuries under the relevant Texas or Pennsylvania laws. The claimant acknowledged that the buyer hadn’t manufactured or sold the device. However, she argued that the buyer should be held liable due to a successor-liability theory. This theory claimed that the buyer, through an alleged fraudulent transfer, acquired the device assets from the seller.
The Court’s Ruling:
The court dismissed the claim against the buyer with prejudice. The court noted that the claimant’s complaint lacked both factual basis and legal grounds for asserting successor liability or fraudulent transfer. The court highlighted that only one aspect aligned with the claimant’s argument: that the buyer was aware of ongoing litigation against the seller before acquiring the assets. However, this single factor alone was insufficient to establish inadequate consideration or concealed transfer.
This case is referred to as Barcelo v. Teva Pharmaceuticals Usa, Inc., Civil Action No. H-20-00017, United States District Court, S.D. Texas, Houston Division, (April 2, 2020)
Comment:
The court’s decision was based on Texas law, and it might have varied if California law had applied. California has developed a product line exception that could potentially impose successor liability on the buyer in such a scenario. Nonetheless, only a few states have adopted this exception as California did.
By John McCauley: I help people manage M&A risks involving privately held companies.
Email: jmccauley@mk-law.com
Profile: http://www.martindale.com/John-B-McCauley/176725-lawyer.htm
Telephone: 714 273-6291
Check out my book: Buying Assets of a Small Business: Problems Taken From Recent Legal Battles
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