Product Liability Law Applies to Internet Products

Dec 08, 2017         New Jersey Law Journal

Courts support the view that an internet product’s characteristics, including intangibility and being licensed, do not bar product liability treatment.

By Jonathan Bick  Bick is of counsel at Brach Eichler in Roseland, where he handles the prosecution and litigation of complex intellectual property matters. He is also an adjunct professor at Pace and Rutgers law schools.

The internet’s value arises in part from its ability to provide images, data and content quickly and at little cost. This ability results from the fact that internet products — whether they be images, data or content — are each reduced to a digital format. Sharing products that have been so reduced may result in two types of product liability: (1) providing an internet product, and (2) facilitating such providing.

Since digital formatted images, data and content, which are the basis of internet products, are intangible, internet products are not generally covered by the dictionary definition of a “product.” Consider that the typical definition of a product is an article or substance that is manufactured or refined for sale.

However, from a legal perspective, it is clear that internet products are “products” for the purposes of products liability. More specifically, the Third Restatement appears to treat internet products as products. More particularly, the Third Restatement (Restatement (Third) of Torts: Prod. Liab. §19(a) (1998)) states that products are tangible personal property distributed commercially for use or consumption. It goes on to states that tangibility is not a necessary condition, since other items are products when the context of their distribution and use is sufficiently analogous to that of tangible personal property to apply strict products liability. It also states that a product does not need to be sold outright to be a product. Thus, internet products that are licensed are still subject to products liability claims.

Courts also support the view that an internet product’s characteristics, including intangibility and being licensed, do not bar product liability treatment. Specifically, courts generally assumed a flexible definition of product, “rejecting a … dictionary definition, and instead adopting a policy-based technique to determine whether [a] transaction … deserves Section 402A protection.” Consider Lowrie v. City of Evanston, 365 N.E.2d 923 (Ill 1977), which found that a product’s liability for harm should be considered in determining whether something is a product rather than the dictionary definition of the word product.

The Restatement does not specifically opine as to whether internet products are products, but there is enough case law related to internet products (and similar electronic software products) to accurately predict a judicial response. In short, courts are willing to apply product liability when internet products result in accidents.

Some exceptions exist to the presumption that all internet products are products for liability purpose. First, courts have found that some items described as products, such as custom made software is not a product for product liability purposes. For example, when internet products are specifically created under contract for a single client, the custom-made software is a service not a product. The court in Micro-Managers v. Gregory, 434 N.W.2d 97 (Wis. 1988), found that a software purchaser’s refusal to pay could not be based on a product-liability warranty breach for the product because the contract spoke in terms used in professional services agreement. In sum, internet products, like software products that are bespoke in nature (built at the behest of—and only for—a single client) will likely be found to be services and therefore not subject to product liability.

However, customized internet products, like customized software products will likely be subject to product liability. In the case of a customized internet product, the product provider is not a service provider but rather a manufacturer of a product which may be accessed and personalized based on an internet user’s interface and data.

A company could argue that its customized interface is akin to the software in those service cases insofar as it is tailored to the client’s precise needs. Such argument might be based on analogies to RRX Indus. v. Lab-Con, 772 F.2d 543 (9th Cir. 1985), which found that training and upgrading were insufficient to classify the software product in question as services.

However, such arguments are not likely to prevail, particularly in light of the application of the Uniform Commercial Code by courts. Consider In Surplus.com v. Oracle Corp., 2010 WL 5419075 (Ill. 2010), where the court found that a software development agreement that was governed by the UCC was not a service.

More specially, the court In Surplus.com granted the defendant’s motion to dismiss, finding that the four-year statute of limitations for breach of contract under the UCC applied to the plaintiff’s claims. The court found that the custom software transactions were ancillary to the software that was the heart of the relevant agreement. Thus, the court concluded that supplying some customizing aspects to the transaction did not render the software a “service” rather than a “good” under the UCC. The courts are likely to apply such rationale to customized internet products.

Upon establishing that internet products are “products” for product liability purposes, the two most common bases for product liability should be considered: namely, providing the internet product and facilitating such providing.

The most obvious internet product liability arises from the use of said internet product as an instrument. For example, the internet product offers to differentiate among edible and poisonous mushrooms, or perform aeronautical charts function, and then fails. In such cases, product liability has been well established. The instrumental argument for finding product liability is analogous to a physical product because it performs like a physical product in its self-executing physical effect on the world.

A less obvious internet product liability arises when an entity facilitates the sharing of a defective internet product. This legal difficulty is addressed by the Communications Decency Act (CDA) (47 U.S.C. §230 (2012)). The CDA preempts state-law products liability for the shared physical product. While case law provides no definitive answer, it is entirely possible that this federal law preempts such products liability claims.

The CDA, particularly Section 230, was enacted to protect internet service providers. Specifically, it addressed concerns about liability that could accrue to internet service providers and internet platforms for claims stemming from their publication of information created by third parties.

The CDA offers sweeping immunity in all types of claims that are preempted. These preemptions include all internet-intermediated products liability claims. However, the CDA provides no immunity for original content. Thus, an internet product provider’s facilitation of the sharing of a defective internet product would not be immune from product liability action, but a third party’s use of the same facilitation (sharing a defective internet product) would be immune from product liability action.