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PART II: Contract Liability (Cont'd)

Sales and Deceptive Trade Practices

Forty-nine of the fifty states have adopted the Uniform Commercial Code (UCC). The UCC governs contract law involving commercial goods, but it is not applicable to services. Many states have adopted a much stronger basis of personal liability for engineers and others who sell products or services to consumers. This hybrid cause of action is based on merged concepts of warranty and fraud and is typically called "deceptive trade practices." Basically, the idea is that a seller who warrants what he is selling should know whether or not the warranty is valid, and should deal honestly with the consumer. This principle applies regardless of whether the warranty is express or implied. If the warranty proves to be invalid, the promise underlying it is fraudulent, and the sale practice was deceptive. In such cases, the seller may be given an opportunity to perform as promised in the warranty or pay damages, or face the possibility of what amounts to punitive damages.

Hypothetical Example

An internationally recognized physician (Smith) invented an insulin pump that requires no adjustments by the user. Smith realized that the pump would have enormous market potential and that a copyright, patent, or some other type of legal protection would be necessary to protect the idea underlying the invention. Smith also realized that a medical device in the hands of a patient carried with it an enormous potential for liability. However, Smith didn't have an attorney, and rather than pick one "blind" and pay him or her, one Sunday morning Smith consulted an attorney-acquaintance who attended the same church. On the way to the parking lot the attorney told Smith to form a Subchapter S corporation, apply for a patent on the pump, and assign the patent rights to the corporation. Smith formed Diabetics, Inc., hired six employees, and assigned the patent rights to the new corporation. After a few months, the patent was issued and the FDA approved the pump. Smith's only role in the new corporation was that of principal stockholder. During this period, Diabetics, Inc. developed an advertising campaign which included the statement: "This easy-to-use automatic insulin pump was invented by world-famous diabetic expert, Dr. John Smith; it is so good, it is patented!" Diabetics, Inc. manufactured 200 automatic insulin pumps before going broke and disbanding. All of the first Diabetics insulin pumps put in use produced excellent results and were written up in several scientific journals and trade magazines; Newsweek and the New York Times carried articles about the new pump and its famous inventor. Jones, a diabetic who was very impressed by Smith's reputation, asked his physician to prescribe one of the automatic pumps. On the tenth day that Jones used the pump, it failed, and he went into insulin shock. Jones sued his physician for malpractice and Smith for failing to provide a pump that was automatic. The case against the physician was dismissed, and Smith argued that (1) mere shareholders or a corporation are not liable for corporate acts, and (2) the only contracts were between Smith and Diabetics, Inc. (the patent assignment) and Diabetics and Jones (the pump sale), and therefore Smith had no contractual duty to Jones. However, the court found that it was not unreasonable for Jones to believe that Diabetics, Inc. was acting on Smith's authority. Since Jones had been promised an insulin pump that was automatic, but that was not what he received, Smith was held liable for breach of an implied warranty and deceptive trade practices. Jones' damages were therefore trebled.

Previous - Assignments and Licenses as Contracts and Warranties

 


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