Herzfeld & Rubin, P.C.- Publications

Products Liability *'Clarifications: Motions to Dismiss, Inconsistent Verdicts* By Michael Hoenig - New York Law Journal - December 12, 2006	Print article

Two decisions on different topics, issued by the U.S. Court of Appeals for the Second Circuit in September offer guidance to practitioners on questions that can recur.

The Faulkner opinion clarifies the extent to which a district court may consider materials beyond the complaint when a motion to dismiss for failure to state a claim is made. The Kosmynka opinion discusses inconsistent verdicts when a jury, in answer to special interrogatories, says "No" to strict liability and breach of warranty but answers "Yes" to negligence in design and warnings. In granting a new trial the panel distinguishes the circuit's prior Jarvis and Denny decisions which upheld liability.

Rule 12(b)(6) Motions

Under Federal Rule of Civil Procedure 12(b) a party who has to respond to a pleading has an option to assert certain defenses by motion. Seven of them are specified in the rule, most dealing with preliminary issues such as subject matter and personal jurisdiction, insufficiency of process or its service, improper venue or failure to join a party needed for a just adjudication. One of the Rule 12(b) motions, however, addresses the merits of the case right up front. This is the Rule 12(b)(6) motion asserting a failure of the pleading to state a claim upon which relief can be granted. Here the responding pleader essentially is saying that, based on a consideration of the complaint itself, there is no case, no right to recover. But what if matters outside the complaint are presented to the court and not excluded? Then Rule 12(b) says the motion to dismiss should be treated and disposed of as a motion for summary judgment under Rule 56.

Does that mean, however, that every Rule 12(b)(6) motion in which something other than the text of the complaint is considered inevitably loses its character as a motion to dismiss and must be treated in accordance with summary judgment practice? A recent decision by the Second Circuit, Faulkner v. Beer,¹ clarifies that there are limited exceptions when materials outside the complaint are not foreclosed. However, the vitality of the rule is normally preserved so that a dismissal for failure to state a claim may have to be vacated when matters outside the complaint and beyond the limited exceptions are used to support the 12(b)(6) motion. This means that counsel for the parties relying on or opposing use of the outside materials need to be mindful of the boundary lines.

Faulkner was a suit by investors alleging securities fraud against a corporation and its officers and seeking recovery for losses and punitive damages. An amended complaint claimed violations of federal statutes, breach of contract and breaches of fiduciary duties. Defendants moved to dismiss under Rule 12(b)(6) for failure to state a claim along with some Rule 9 deficiencies about not pleading fraud with particularity. The parties submitted several documents in connection with the motion to dismiss such as Offering Memoranda, Annual Reports and a Prospectus. Plaintiffs also introduced declarations by two individual claimants and an affidavit by a defendant but, as to these, it was not clear to the appellate court the extent to which, if at all, such materials were actually relied upon by the court. The circuit panel said it would be error to rely on a factual contention contained in a declaration.²

Limited Exceptions

The Second Circuit explained that, on a 12(b)(6) motion, consideration of materials outside the complaint is not entirely foreclosed. So, for example, it is permissible to consider the full text of documents partially quoted in the complaint.³ It is also permitted to rely on material extraneous to the complaint if the material was integral to the complaint and was relied on by the plaintiff in drafting the complaint.⁴ Thus, for example, a contract between parties "integral" to a complaint alleging breach of contract could be considered on a motion to dismiss.⁵

However, said the appellate court, before outside-the-record materials may become the basis for a dismissal, several conditions must be met. Even if a document is "integral" to the complaint, "it must be clear on the record that no dispute exists regarding the authenticity or accuracy of the document."⁶ It also must be clear that there exist no material disputed issues of fact regarding the relevance of the document. Here these conditions were not met. In considering the Offering Memoranda, Annual Reports and a Prospectus, the district court did not conduct any analysis as to which plaintiffs had received which documents and precisely when.

Dismissal under 12(b)(6), however, critically depended on whether specific plaintiffs had made their investments before the issuance of the foregoing documents. For example, if a plaintiff had not received a copy of either Offering Memorandum, then that plaintiff's claims could not be dismissed based on warnings about risk in such document. The same difficulties applied to the Annual Reports and Prospectus. The district court seems to have assumed that all plaintiffs had received all of the documents attached to the complaint. But the complaint itself puts that factual assumption into dispute. Then, at oral argument, defendants "added to the chaos" by raising yet other documents to fill in certain gaps. Whether those documents were considered or are even in the record was left uncertain. Accordingly, the 12(b)(6) dismissal had to be vacated.

Inconsistent Verdict

What should be done when a product design and warnings claim is tried and the jury votes for defendant on the strict products liability and breach of warranty claims but finds for the plaintiff that the product was negligently designed or that defendant negligently failed to provide adequate safety warnings? That was the situation in Kosmynka v. Polaris Industries, Inc.,⁷ a Second Circuit decision issued in September.

Plaintiff suffered a paralyzing injury while loading an all-terrain vehicle (ATV) onto a tilt-bed trailer. He attempted to ease the ATV up the trailer bed but the front wheels climbed the far wall of the trailer, causing the vehicle to tip over backwards and land on top of plaintiff. After the trial, the district judge instructed the jury on negligence, strict products liability and breach of implied warranty. The jury said "Yes" to negligence "in the design or failure to adequately warn" but answered "No" to the interrogatories asking whether the ATV was defective in design or for failure to adequately warn, and whether there was a breach of implied warranty.

Defendant's counsel immediately asked for a sidebar conference and advised that the findings were inconsistent, that the jury had misapplied the negligence charge by finding the defendant negligent even though the product was found not defective. Counsel for both sides explained that the jurors could be re-instructed since they were still empaneled. The trial court, however, deemed re-instruction impracticable since they already had the charge in front of them and refused to declare a mistrial. Instead, the court allowed the verdict to stand and entered judgment. Defendant's post-trial motions were denied.

On appeal, the Second Circuit panel reviewed New York's legal standards for negligence and strict products liability and analyzed plaintiff's trial showing on the design and warnings issues.⁸ The panel concluded that: there was insufficient evidence to support a finding of negligent design; plaintiff introduced no reasonable alternative design that would have made the ATV safer without materially impairing the vehicle's utility; indeed, plaintiff failed to demonstrate that a so-called "tilt switch" that was never tested by plaintiff's experts on any ATV would have been practical or would have prevented the accident.

On the adequacy of the warnings, the panel viewed the proofs as "a closer call." While the manufacturer knew that its vehicles would have to be loaded on trailers and had potential to climb walls and flip over, defendant had no reports of their vehicles doing so. The jury was asked if there was negligence in design or warnings so the court could not determine exactly what the jury found to be negligence, the design or the warnings. Concluding, however, that there was not a "complete absence" of evidence on the warnings issue, the Second Circuit upheld the trial court's denial of defendant's motion for judgment as a matter of law.

New Trial Ordered

What about the motion for a new trial? Here the appellate panel agreed that the verdicts were inconsistent and that a new trial was required. The jury's answers to special interrogatories must be consistent with one another. If the jury's answers cannot be harmonized, a new trial must be ordered. Although a party waives its objection to any inconsistency in a jury verdict if it fails to object to the verdict prior to the excusing of the jury, here defendant brought the inconsistency to the court's attention "at the earliest possible moment." But there is no authority supporting the plaintiff's view that a dissatisfied party must "ensure" that the court keep the jury. A litigant "preserves the issue for appeal by exposing the inconsistency before the jury is dismissed," so that the court has the option of re-submitting the questions after further instructions. That done, a lawyer "waives nothing by urging the court to adopt the course that best favors that lawyer's client."⁹

The court went on to distinguish cases where an inconsistency was caused by an improper jury instruction or verdict sheet and there was no objection to these items prior to submission of the case. In such cases the defect in the charge or verdict sheet puts the appellant on notice of the potential for a defective verdict. That was the situation in the circuit's Jarvis and Denny cases.¹⁰ Here, however, the problem was with the jury's verdict only so Federal Rule of Civil Procedure 51, intended to give the court an opportunity to cure instructional defects, was not implicated.

Were the verdicts inconsistent? "Yes," said the court. Both negligence and strict products liability require a showing of a product "defect." While a manufacturer could be strictly liable for a product defect even if not negligent, the reverse is not true. The trial court's instructions, consistent with New York law, had explained that a finding of negligence mandated a corollary finding of strict products liability. The jury ignored or misunderstood that instruction. The finding of no defect "necessarily negatived" an element of the negligence claim, i.e., that the "defect" was a proximate cause of the accident. Accordingly, a new trial was required.

Michael Hoenig is a member of Herzfeld & Rubin.

Endnotes:
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[1]. 463 F3d 130 (2d Cir. 2006).
[2]. Id. at 134 n. 1 (citing Friedl v. City of New York, 210 F3d 79, 84 (2d Cir. 2000)).
[3]. Id. at 134 (citing San Leandro Emergency Med. Group Profit Sharing Plan v. Philip Morris Co., 75 F3d 801, 808-09 (2d Cir. 1996).
[4]. Id. n. 1 (citing Global Network Communications, Inc. v. City of New York, 458 F3d 150 (2d Cir. 2006).
[5]. Faulkner, 463 F3d at 134 (citing Int'l Audiotext Network, Inc. v. Am. Tel. & Tel. Co., 62 F3d 69, 72 (2d Cir. 1995)).
[6]. Faulkner, 463 F3d at 134 (citing other circuits' decisions).
[7]. 462 F3d 74 (2d Cir. 1006).
[8]. Id. at 79-82.
[9]. Id. at 83-84.
[10]. Jarvis v. Ford Motor Co., 283 F3d 33, 56-57 (2d Cir. 2002); Denny v. Ford Motor Co., 42 F3d 106, 111 (2d Cir. 1994).