Defective-Product Verdicts Against Companies Increase

Cybex International Inc., a fitness equipment maker, lost a $66 million jury verdict in New York last month to an assistant physical therapist who was paralyzed when an exercise machine fell on her at work.

For Cybex, whose chief operating officer said he has no idea what the company did wrong, timing may have played a role. The state court jury’s Dec. 7 decision in Buffalo illustrates the most prominent trend in U.S. court verdicts in 2010: a surge in awards against companies accused of putting defective products on the market.

The stalled economy and a surfeit of negative corporate news, such as the BP Plc oil spill, sudden-acceleration suits against Toyota Corp. and bank foreclosure practices, has fueled public anger, affecting lawsuits against companies in unrelated cases across the country, legal experts said.

“Jurors are more willing to believe that there was corporate wrongdoing that was intentional,” said Ophelia Camina, a lawyer at Susman Godfrey LLP in Dallas who won a $246 million verdict last year in a breach-of-warranty and fraud case against JDA Software Group Inc. “It’s easier to get people angry when they’re already brooding.”

The Cybex verdict, which was more than twice the company’s market value, sent its shares down 37 percent. The accident was unprecedented and not the result of a faulty product, the Medford, Massachusetts-based company said. Cybex said it plans to appeal.

“We’ve never had something like this,” President and Chief Operating Officer Arthur W. Hicks Jr. said in an interview. “What we did wrong, I have no idea.”

Year to Year

Ten of the 50 largest jury verdicts last year came in product-defect cases, compared with five in 2009 and one in 2008, according to data compiled by Bloomberg. There were 15 such verdicts of $25 million or more in 2010, compared with seven in 2009.

The largest jury verdict of the year of any kind was for $1.3 billion in a copyright-infringement action against SAP AG. That was also the largest copyright jury award in U.S. history, almost 10 times higher than the second-biggest, according to Bloomberg data.

The top product-defect verdict was for $505.1 million against Teva Pharmaceutical Industries Ltd., the Israeli drugmaker, and its U.S. distributor, in a Nevada case over a claim that packaging of its anesthetic propofol created a risk of contamination and led to the plaintiff’s hepatitis. Three of the top 10 were in smokers’ suits against tobacco companies, led by a $152 million award against Lorillard Tobacco Co. in Boston in December.

Largest Verdicts

The total of the largest five product-liability verdicts was $1.1 billion, up from $620 million in 2009 and $408 million in 2008. The 77 percent growth from last year accelerated a trend from the previous year, when the biggest five product verdicts rose 52 percent from 2008.

“There hasn’t been any radical change in product-liability law to cause this,” said Victor E. Schwartz, a Washington attorney and litigation expert who represents companies. “It’s more atmospheric than legal.”

Attorneys for corporations facing product-defect claims are finding it harder to weed out bias during jury selection, said Schwartz, who is general counsel of the American Tort Reform Association and a Shook Hardy & Bacon LLP partner.

“The old form of bias was when a juror may have had a personal interest in the case or a bias for a plaintiff or against a particular defendant,” he said.

Prejudice today “is more subtle and not always conscious,” he said. “It’s a blue-collar feeling that corporate America doesn’t really care, and that’s difficult to eliminate in voir dire,” the jury selection process.

Recession’s Impact

Outcomes in cases still “in the pipeline” may reflect the recession’s impact, said Carl Tobias, a University of Richmond law professor in Virginia.

“What’s happened to the economy could well make people distrustful of big entities, particularly corporate ones,” Tobias said. “There may be a fair amount of exposure going forward.”

More than 9,000 smoker health claims against the tobacco industry are in courts in Florida, according to Altria Group Inc.’s most recent regulatory filing. The claims of another 649 plaintiffs, including 370 suing Altria’s Philip Morris, are scheduled for trial in March in West Virginia, the company said.

The tobacco companies are at a disadvantage in the Florida cases. A state Supreme Court decision there applied a prior jury’s finding that cigarettes are defective and that smoking can cause cancer to other cases, said Theodore J. Leopold, a plaintiffs’ lawyer who has no tobacco cases.

Behind Eight-Ball

“The tobacco industry goes into these cases so much behind the eight ball,” said Leopold, of Palm Beach Gardens, Florida’s Leopold-Kuvin PA.

Not all of these claims result in plaintiffs’ verdicts, said Steve Callahan, a spokesman for Richmond, Virginia-based Altria. Philip Morris won seven of the 12 cases in Florida that went to trial in 2010, he said in an interview.

“Jurors in Florida can see that people are responsible for their own decisions” about smoking, Callahan said.

There may be another reason for the rise in large product- defect verdicts, said Will Kemp, a lawyer who was part of the team that won the $505 million jury verdict against Teva.

It’s “cheap defendants and cheap insurance companies,” Kemp said in an interview.

“The defendants and the insurance companies are holding onto their money and they’re not settling the cases,” he said. “When the recession started, everyone started to hold on to their money. They’re making people try more cases.”

$54 Million Verdict

Gene Egdorf, an attorney who won a $54 million product- defect verdict in January 2010 against Caterpillar Inc., the world’s largest maker of construction and mining equipment, agreed.

“It’s getting tougher and tougher to get cases settled,” Egdorf said. “The companies may be hoping for better results on appeal.”

Many of the verdicts of 2010 may be reversed or reduced on appeal, or in post-trial motions, as typically happens to the biggest jury verdicts in product-liability suits.

The largest one in 2009, for $300 million against Philip Morris, was slashed to $38.9 million by the trial judge and is now being appealed by the company.

However Cybex’s appeal turns out, the company took an immediate hit from the verdict, said Hicks, the chief operating officer.

“Our shareholders just lost a huge value on the fear of what might happen,” he said. “This is real money. This is peoples’ lives. This is going to cost all of us until it’s resolved rationally.”

Cybex rose nine cents to 84 cents, up almost 12 percent. The shares are down 35 percent since the verdict was announced.

To contact the reporter on this story: Margaret Cronin Fisk in Southfield, Michigan, at mcfisk@bloomberg.net.

To contact the editor responsible for this story: David E. Rovella at drovella@bloomberg.net.

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