Mettinger v. Globe Slicing Machine Co., Inc.

153 N.J. 371, 709 A.2d 779 (1998)
  • Opinion Date: May 14, 1998

CORPORATIONS ; SUCCESSOR LIABILITY—Absent an agreement to the contrary, distributors and retailers may use the product-line exception to seek indemnification from corporations that purchase all or substantially all of the original manufacturer’s assets and undertake essentially the same manufacturing operation as that corporation.

Where one corporation acquires all or substantially all of the manufacturing assets of another corporation, even exclusively for cash, and undertakes essentially the same manufacturing operation as the selling corporation, the purchasing corporation is strictly liable for injuries caused by defects in units of the same product line, even if previously manufactured and distributed by the selling corporation or its predecessor. This is known as the “product-line exception.” In addition, an action may be maintained against an intermediary successor corporation that acquired the original manufacturer’s assets and continued its product line but sold those assets to another corporation before any accident occurred. By acquiring the business assets of the original manufacturer and continuing to manufacture and sell its product line, the intermediary successor became an integral part of the overall producing and marketing enterprise that should bear the cost of injuries resulting from defective products. Although the “product-line exception” is the rule in only a minority of states, it is the law in New Jersey. Prior to this case, no New Jersey decision had examined whether a defendant distributor or retailer may use the product-line exception to maintain a third-party action for indemnification against a successor manufacturer. In this case, the current owner of the product line argued that the distributor which sold and serviced the defective meat slicer that injured the plaintiff is not entitled to indemnification because the product-line exception is intended to benefit injured plaintiffs only. The Supreme Court, however, declined to apply the product-line exception so narrowly. In doing so, it was persuaded by the California Court of Appeals, which explained: “the constant theme of strict of tort liability has been ‘to elevate justice and equity above the exact contours of a mathematical equation… .’” Continuing with this reasoning, the Supreme Court sought to achieve fundamental fairness through a balancing of the rights of the injured party against the reasonable commercial expectations and the rights of those engaged in business. Even though a primary justification for the product-line exception is to provide compensation for otherwise remediless victims of a defective product, it felt that imposition of successor liability on corporations also serves the public interest “of spreading the risk to society at large for the cost of injuries of defective products.” “In general, manufacturers are in a better position to avoid and allocate risks than distributors.” The Court also felt that successor manufacturers have “virtually the same capacity as [the original manufacturer] to estimate the risks of claims for injuries from defects in previously manufactured [products] for purposes of obtaining insurance coverage or planning self-insurance.” Ordinarily, manufacturers must bear the cost of indemnifying entities lower on the chain of distribution. Therefore, in the Court’s view, successor manufacturers must also bear that cost.

The current manufacturer also argued that even if retailers and distributors may resort to the product-line exception to obtain indemnification, application of the exception in this instance was inappropriate because it did not even exist as an entity when the original plaintiff was injured or when the suit was originally filed. Under its theory, it had not benefitted from the continuation of the product line or its goodwill and it had no opportunity to implement cost avoidance or risk spreading measures. The Court rejected this argument finding no unfairness in imposing successor liability in such a situation. In its view, although the successor was not benefitting from its predecessor’s enterprise or goodwill at the time of the injury, it so benefitted after its purchase. Moreover, it could take into account pre-existing claims when determining the terms of its asset acquisition. Finally, the current manufacturer contended that permitting a distributor to rely on the product-line exception would constitute a new rule of law and should only be applied prospectively. The Supreme Court disagreed. In the Court’s view, the successor manufacturer knew of the action when it acquired the assets and therefore its liability should not have been unexpected.

A dissent was filed challenging continuation of the product-line exception as unjustified, unfair, and socially wasteful. It then continued its criticism with the argument that the rule impedes the free alienability of corporate assets for no compelling reason, that it would encourage the dissolution of a financially troubled corporation by piecemeal sale of assets rather than as a going concern with the end result being the needless destruction of an ongoing business enterprise with no net advantage to anyone. The dissent continued that even if the product-line exception should remain as the law of New Jersey, there is no connection between the public policy considerations in establishing the rule and extending the rule to benefit distributors, especially when the current manufacturer was not even in existence at the time of the injury or the filing of the suit.