Toxic Tort Litigation Blog : Toxic Tort Lawyer & Attorney : Epstein Becker Green Law Firm : Product Liability, Contamination, Pollution

What is the duty of a real estate developer to disclose to prospective residential purchasers information about the neighborhood that may adversely impact property values? Apparently none if the developer is not in privity with the homeowners, according to the Eleventh Circuit.

 On May 21, 2012, Law 360 reported on the Eleventh Circuit’s decision in Luis Virgilio v. Terrabrook Vista Lakes L.P., et al. , Case No. 11-11027 (5/18/12).  We have discussed in a past article the circumstances under which a commercial  real estate broker may be found have a duty to disclose environmental liabilities to a prospective purchaser.  Here, the court was clearly troubled by the question of how far the developer's potential liablity to disclose "inside information" would extend and how an obligation to disclose this information could be satisfied.. 

By way of background, class action plaintiffs purchased their homes from a builder, The Ryland Group, Inc. (“Ryland”), in a subdivision in Vista Lakes, a residential development in Orlando, Florida. Unbeknownst to the Virgilios (and other members of the class), the homes they purchased from Ryland were located adjacent to Pinecastle,  a World War II bombing range that, to this day, remains laden with unexploded bombs, ammunition, ordinance and related chemicals. Once Pinecastle’s existence became public, the homes in the subdivision lost considerable market value and the Virgilios brought this lawsuit to compensate for their loss.

Plaintiffs entered into a $1,200,000 settlement with Ryland and then turned their attention to the four other defendants involved in the development and marketing of the subdivision. However, on the same day that the district court certified the plaintiff class and approved the Ryland settlement, it dismissed plaintiffs’ claims against the remaining defendants as legally insufficient. On appeal, the Eleventh Circuit affirmed the trial court ruling in all respects.

Plaintiffs pursued four legal theories against the developer defendants, all based on their failure to inform plaintiffs about Pinecastle before they purchased their homes. One developer/defendant, Terrabrook, sold Ryland the undeveloped land that became the subdivision. At the time of the sale, Terrabrook informed Ryland of Pinecastle’s existence. Terrabrook actively marketed Vista Lakes to prospective buyers and received a commission for each home or lot sold.

Count 1 of the Complaint attributed the defendants’ duty to disclose to the Florida Supreme Court’s landmark decision in Johnson v. Davis, which holds that “when a seller of a home knows the facts materially affecting the value of the property which are not readily observable and are not known to the buyer, the seller is under a duty to disclose them to the buyer.”

In Johnson v. Davis, the court overturned the old rule that  “where the parties are dealing at arms length and facts lie equally open to both parties, with equal opportunity of examination, mere non-disclosure does not constitute fraudulent concealment.” The Florida Supreme Court concluded, however, that this rule was “not in tune with the times and did not conform with current notions of justice, equity and fair dealing.” Thus, Florida’s high court held that the law required “full disclosure of all material facts” whenever “elementary fair conduct demands it.”

In rejecting plaintiffs’ argument that Johnson v. Davis should be applied to uphold their claims, the Eleventh Circuit found no facts to support the plaintiffs’ conclusory allegation that the defendants were acting as Ryland’s agent in promoting homes in the development. As the Court noted, “Count 1 is missing an essential allegation – the critical element of an agency relationship – that the principal exercised, or had the ability to exercise, control over the agent.”

Count 2 is silent as to the source of the duty, but suggests that it lies in equity since it is a claim for unjust enrichment. Count 2 alleges that because defendants failed to inform plaintiffs about Pinecastle, it would be inequitable for defendants to retain the benefits. Count 3 locates the duty in the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”), FLA Stat. §§ 501.201 et seq., asserting that defendants’ failure to inform plaintiffs about Pinecastle constituted a “deceptive, misleading and unfair trade practice.” Count 4 locates the duty to disclose in common law negligence.

The heart of the Eleventh Circuit's decision is its refusal to extend Johnson v. Davis.  The court found that the case did not apply because: (1) the defendants were not in privity with the buyer or acting as an agent in privity with the buyer (such as the seller’s real estate broker); and (2) there was no allegation in Count 1 that defendants’ “marketing efforts were at the behest or direction of Ryland, that Ryland exercised any control over [the] marketing efforts, or that [defendants] actually listed any of the homes… on behalf of Ryland.”

Applying the same logic to Count 2, the court held that even assuming the plaintiffs conferred a benefit on defendants, Johnson’s duty to disclose did not extend to defendants. Thus, since defendants did not breach a duty to plaintiffs, plaintiffs had not been wronged and defendants were not unjustly enriched. The trial court dismissed Count 3 because the alleged FDUTPA “deceptive or unfair trade practice” was the breach of an affirmative duty of disclosure. Since the Court determined in dismissing Count 1 that there was no such duty, the FDUTPA claim was dismissed as well.

In essence, the Eleventh Circuit found plaintiffs’ "argument – that because defendants developed and marketed Vista Lakes, they had a duty to warn prospective purchasers of Pinecastle’s existence – without merit."  Rejecting plaintiffs’ logic, the Court observed:

What about those to whom Ryland’s home buyers sold their houses? Would Terrabrook have a duty to them as well? Since Terrabrook was not a party to Ryland’s contracts with the buyers, and thus did not know the buyers’ identities, under Plaintiffs’ approach the only way Defendants could discharge their duty of care would be through marketing: Defendants could not escape liability unless they saturated the market place with the negative information

Would  the case have turned out differently if the developer had prepared brochures that affirmatively misrepresented the environmental condition of the neighborhood?  In granting summary judgment, the district court said that while it was foreseeable that the defendants' general marketing campaign could lead some members of the public to consider purchasing a home in Vista Lakes, the general marketing had nothing to do with any particular home in Vista Lakes and simply put plaintiffs in face-to-face discussions with Ryland.

  For more on the lower court's decision and a discussion of developments built on former bombing ranges, see Larry Schnapf's informative discussion titled "Home on the Bombing Range" and his more recent discussion about the Eleventh Circuit's decision.

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Consumer Reports, among others, reported this week that the International Agency for Research on Cancer ("IARC"), which is part of the World Health Organization ("WHO"), has classified low-level radiation from cell phones as "possibly carcinogenic to humans" based on limited evidence linking cell phone use to glioma, a type of brain cancer.  Although Consumer Reports concluded in its article that IARC's action was based on "limited evidence" and doesn't "convincingly" link typical cell phone use with cancer, an American public that often skims only headlines of articles, may be susceptible to appeals of sympathy by plaintiff lawyers representing long-time cell phone users with brain cancers.  Throughout the 1980's the utility industry battled spurious claims, premised upon junk science, that electromagnetic field radiation was responsible for "cancer clusters" of child leukemias and other dreaded diseases.  Although virtually every major EMF toxic tort claim was successfully defended by industry over a period of years, tens of millions of dollars was spent defending these lawsuits, which were brought in courts all  across the country.  As in the case of low dose radiation from cell phone use, there were  millions of millions of potential plaintiffs in the EMF cases and all of the prospective utility industry defendants had deep pockets. Following issuance of the IARC release, a spokeswoman for the Federal Communications Commission ("FCC") stated that FCC currently requires that all cell phones meet safety standards based upon the advice of federal health and safety agencies.  Moreover, according to the National Cancer Institute's Surveillance Epidemiology and End Results Program ("SEER"), the incidence of brain cancer in the United States has actually declined over recent years as cell phone use has skyrocketed.  Despite these reassuring pronouncements, well-heeled plaintiff lawyers may bring some cases as trial balloons to test industry resolve based upon other equally ambiguous pronouncements, such as the contention that cell phone use can affect "brain function".  As in the cases brought against chemical manufacturers in the 1980's,  which alleged that chemicals cause generic  "immune system dysfunction", enterprising plaintiffs may attribute any number of injuries to purported "brain function" impacts.  Hopefully, courts will continue to exercise their gatekeeper roles to maintain some semblance of scientific rigor in the courtroom to exclude inconclusive science  if these cases are brought. 

On October 6, 2010, the Federal Trade Commission proposed revised “Green Guides”, the guidance provided to corporate marketers to help them avoid making misleading environmental claims. The Green Guides were first issued in 1992 and revised in 1996 and 1998. The proposed Guides issued last week are designed to significantly strengthen the FTC’s prior guidance and provide new guidance on marketing claims that were not commonly asserted in the 1990’s before the “Green Revolution”. Although the FTC is seeking public comments on the proposed revisions through December 10, 2010, the guidance issued last week is not likely to be significantly modified.

Based upon a review of the new Green Guides, there are some basic rules of the road that, if followed, will help companies avoid “Greenwashing” claims and the consumer class action suits which are likely to become increasingly common: (1) Avoid unqualified general environmental marketing claims that are difficult, if not impossible, to substantiate; (2) General claims of environmental benefit should be accompanied by qualifiers that are clear, specific and accurate; (3) When using a certification or a seal of approval to promote the green nature of a product, use clear and prominent language to clarify that the certification or seal relates to a particular environmental attribute, which the company can substantiate; (4) If the company is endorsing a product with its own seal of approval, use clear prominent and qualifying language to alert consumers that the company created the certifying program, not an independent third-party; and (5) If only a portion of the product is made with recycled or renewable material, clearly and prominently clarify which portion of the product is made from a recycled or renewable source.

Perhaps surprisingly, FTC’s consumer revealed research found that the public overestimates the significance of “Green” claims, which suggests that “greenwashing” is common and probably profitable. Despite consumers’ increasing cynicism, there must be some deep-seated need to believe that you are a buying an “eco-friendly” product. Going forward, companie seeking to comply with the new guidelines may want to rethink their marketing strategies and avoid making general claims of “environmental friendliness” and focus instead on advertising claims that can be are based on scientific research. 

The FTC’s Green Guides are largely devoid of regulatory jargon often found regulations and are easy to read and understand. The Green Guides provide helpful examples of which kind of claims are acceptable and which are not. Following the adoption of the Green Guides, should we expect that FTC will initiate a spate of enforcement actions to emphasize to industry that the new Green Guides should be taken seriously?  You bet!.

On January 28, 2010, the Louisiana Court of Appeal, Fourth Circuit, affirmed the New Orleans  trial court’s denial of class certification in a series of putative class actions involving alleged exposure to Normally Occurring Radioactive Material (“NORM”) on industrial property located in , Louisiana, which had been used for oilfield pipe and equipment cleaning operations for over forty years. Although class certification was rejected on multiple grounds, the decision relied in large part upon the Louisiana Supreme Court’s landmark decision in Ford v. Murphy Oil USA, Inc., 703 S.2d 542, which involved alleged exposures from hazardous materials from several distinct sources. As in Ford, the class action failed because the Harvey plaintiffs alleged toxic exposures as a result of pipe cleaning activity on the non-contiguous property of three separate and distinct landowners – Rathborne, Grefer and ITCO – over a forty-six year period, with varying amounts of pipe cleaning taking place at different times in different locations (in almost checkerboard pattern) by different companies. Ford stands for the proposition that only mass torts arising from a single common cause or disaster are appropriate for class certification.

How did pipe cleaning cause the alleged NORM exposure? Pipe cleaning involves the mechanical reaming of the inside of oilfield pipe to remove scale or crust that builds up on the interior of the tubing to the point where the scale impedes the flow of oil up the pipe. The scale, formed from natural elements, gradually clogs the pipes that are inserted deep into the ground during the course of petroleum production. At some point, it was determined that the scale inside the pipe contained material determined to be radioactive, with varying half-lives (time for half of the atoms of a radioactive substance to decay), which is called “NORM” or “TERM,” an acronym referring to Technologically Enhanced Radioactive Material. When precisely the oil industry knew or should have known that pipe cleaning could result in occupational exposure to NORM is hotly disputed. The plaintiffs allege that over the decades this pipe cleaning occurred in Harvey, “toxic dust” (NORM/TERM) was deposited in their neighborhoods and was the source of various diseases and illnesses.

What I find interesting about the Fourth Circuit’s opinion is its rejection of the trial court’s determination that the plaintiffs failed to satisfy the numerosity requirement of the Louisiana Class Action Statute, which was a primary basis for the trial court’s denial of class certification. The trial court  found that there was not sufficient numerosity because so many potential class members had already opted out, citing other lawsuits in which 3,748 individuals, a large percentage of the putative class, were involved. These so-called opt-outs were represented by several outspoken plaintiff lawyers, who did not want to see a class certified. The Fourth Circuit ruled that it was premature to opt out of a class before it was certified. A plaintiff could not opt out of a class that did not yet exist. Therefore, the Fourth Circuit found that the numerosity requirement had been met. However,  the Fourth Circuit held that sufficient commonality for class certification was not present. In addition, the Fourth Circuit held that the broad diversity of the diseases and ailments of the plaintiffs underscored the inadequacy of the class representatives representation, leading the court to conclude that there was no typicality. The Harvey TERM plaintiffs complained of diseases ranging from common cold symptoms to reproductive problems and many different forms of cancer.  The plaintiffs' strategy at both the trial court and appellate level was to argue that the court should not be required to conduct a rigorous analysis of whether the facts satisfied the class action requirements.  Plaintiffs argued that the trial court confused a motion to certify a class with a trial on the merits, essentially asserting that it had made too many "factual findings".  However, the Fourth Circuit soundly rejected this argument, citing the Louisiana Supreme Court's decision inBrooks v. Union Pacific Railroad Co., 2008-2035, *6, 2009 WL 1425972 (La. 05/22/09), which recognized the "essentially factual basis of the certification inquiry and of the district court's inherent power to manage and control pending litigation."  Brooks, 08-2035 at p. 11, 13 So 3d at 554

The Mass Tort Defense Blog reported recently that the North Carolina federal district court overseeing the MDL concerning panacryl sutures declined last week to certify a proposed national class action in In re Panacryl Sutures Products Liability Cases, 2009 WL 3874347 (E.D.N.C. 11/13/09).  The decision is a significant one for pharmaceutical and medical device MDL practitioners because the court's reasoning in denying class certification is broadly applicable to other medical device products. It is increasingly rare for plaintiffs to obtain class certification in medical device litigation and this case is no exception. Panacryl Sutures are synthetic, braided, absorbable surgical sutures, designed to remain in a patient's body for 24-36 months after surgery to provide wound support. Various plaintiffs alleged that Panacryl Sutures were defective in that they allegedly caused a high rate of foreign body reactions when used as directed. Plaintiffs further alleged that the defendants failed to provide adequate warning of the dangers associated with the devices. Plaintiffs eventually filed a motion to certify a National Class Action. The Panacryl sutures were the subject of a  2006 recall by FDA.

In his blog post, Dechert's Sean P Wajert, discusses the various rationale underlying the court's decision not to certify a national class. In evaluating the requirements under Rule 23(a) and Rule 23(b), the court considered the impact that the laws of the various states where plaintiffs reside would have on the proposed class.  Considering Rule 23(a)(3)'s "typicality" requirement, the court found that the plaintiffs had not considered the varying substantive laws governing every class member.  Considering to Rule 23(b), the court found that in class actions governed by the laws of several states, variations in state law often overwhelmed common issues.  The court held that the plaintiffs would have to demonstrate by "extensive analysis" that the laws of interested jurisdictions did not pose "insuperable obstacles" to class certification.  As Mr. Wajert points out, courts have generally found that common questions of fact do not predominate in medical device products cases. In the Panacryl Sutures litigation, the sutures were used in a variety of surgical procedures, which required different techniques and skill sets on the part of the surgeon and presented different risks of post-operative complications.  Thus, it is not likely that any class would have been certified due to a lack of predominance of common issues, let alone a national class. For a further discussion of the policy and legal considerations that warrant denial of class actions in pharmaceutical and medical device litigation, take a look at the enthusiastic discussion of the decision in the Drug and Device Law Blog authored by Jim Beck and Dechert and Mark Herrmann at Jones Day.

BNA Toxics Law Reporter reports that on August 3, 2009, the First Circuit affirmed the dismissal of the American Chemistry Council ("ACC"), formerly known as the Chemical Manufacturers Association, in a case arising from a plaintiff's long-term exposure to vinyl chloride. The First Circuit's decision in June Taylor et al v. ACC, et al is attached. The ACC is the chemical industry's trade association.  The ACC has been effective in improving the image of the chemical industry in the United States and in promoting safety and environmental initiatives within its membership.  The family of Claude Taylor alleged in federal district court in Massachusetts that ACC, along with several chemical manufacturers, should be found liable for failure to warn, conspiracy and fraud for helping to produce false and misleading warnings that were adopted by the PVC industry.  The plaintiff focused on an ACC publication entitled, "Chemical Safety Data Sheet SD-56", which was first published in 1954 and later revised in 1972, claiming that the publication downplayed the danger of VC exposure.  In upholding the trial court's dismissal of the claims against the ACC, the First Circuit held that there was no evidence that the trade association had the "unlawful intent" necessary to establish "substantial assistance liability" under MA law.  The court held that it would have been necessary for plaintiff to prove that ACC was aware of Monsanto's tortious conduct and that it intended to assist or encourage that conduct.  The wide dissemination of SD-56 within the industry was not sufficient to support the claim that the ACC was aware that Monsanto was incorporating SD-56 into its own literature.  ACC's lawyer, Tim Couglin of Thompson Hine, successfully convinced the appeals court that: (1) ACC did not provide "substantial assistance" to Monsanto; (2) ACC had no knowledge of Monsanto's activities; and (3) there was no record evidence to support the underlying conspiracy claim. 

Trade associations do not manufacture or market products, but they have been the targets of toxic tort and product liability plaintiffs nonetheless.  The threshold issue in these cases is whether the association owed a duty of care to the plaintiff.  In cases in which the trade association is alleged to have promulgated a safety standard, the issue often comes down to the degree of control the trade association has over its members.  In the absence of control, the trade association is not as likely to be held liable for failure to warn.  What about a trade association that endorses products?  If a plaintiff's injury is due to a defect in a product bearing the "Good Housekeeping Seal of Approval", for example, is the association potentially liable?  One California court replied in the affirmative if it could be demonstrated that the association obtained economic gain from the endorsement and encouraged the public to purchase the product, and that  the plaintiff relied on the representation to his detriment.  Courts appear to recognize that it is not in the public interest to hold trade associations liable for injuries to remote plaintiffs in tort litigation.  The AAA might rank hotels on the basis of service and cleanliness.  Should the AAA be subject to liability for injuries allegedly resulting from its failing to warn its members that a hotel was located in a bad neighborhood?

In his  recent article, "Made in China: Consumer Product Lawsuits Imported to the United States", Seattle defense lawyer and IADC member Gregory Shelton offers American importers several good suggestions for avoiding potential liability from imported products.  These include: (1) requiring the exporter to comply with all applicable U.S. product quality standards and product safety regulations; (2) obtaining legal counsel in the exporter's home jurisdiction; (3) requiring the exporter to obtain appropriate insurance coverage from an American or international insurer that will protect the importer in the event of a recall or lawsuit; and (4) retaining good legal counsel early.  I would add to Greg's checklist: (5) having an independent U.S. consultant available to test, if necessary, the components of imported products, particularly if an American consumer reports a complaint to the company or to the CPSC.  Early independent product evaluation can be critical for an importer in planning its next steps, such as whether to perform a recall or halt future shipments until an issue can be addressed.  There are many good consultant firms to chose from. One excellent consultant up-to-speed on the new CPSC requirements is Exponent.

However, we disagree with Mr. Shelton when he argues that Chinese imports are more likely to result in lawsuits or recalls than imports from other countries.  There is simply no empirical evidence to support this assertion.  To the contrary, China has made enormous progress, particularly over the last year, to police its domestic suppliers.  To blame China for the spate of recalls over the last couple of years is to ignore the past lack of adequate funding for the CPSC, the agency that provides regulatory oversight of consumer products.  Moreover, blaming China results in Americans turning a blind eye to problems in our domestic product supply chain. 

People living near manufacturing plants increasingly seek judicial solutions to environmental issues.  In the wake of an environmental incident (such as a release of contaminants into the air or groundwater), fear and suspicion hinder constructive dialog and problem solving by manufacturers and their communities.  Environmental issues, as much as any other corporate concern, tend to have a ripple effect, often causing repercussions with far-reaching impact on company business.  An accidental release may result in adverse public relations, worker safety disputes, boycott of company products in the market place, adverse regulatory consequences and bad feeling in the community.  How a company responds to media attention at the outset has an important effect on how the community, including elected officials, health authorities, regulatory agencies and prospective jurors, react to the issues presented.  Accordingly, a company must plan in advance how it will respond to an environmental crisis and what steps it will take to minimize the fallout from such a crisis. 

A Value Assurance Plan should be considered as one significant component of a corporate response to homeowner concerns over property values.  A Value Assurance Plan, sometimes referred to as a "VAP", is a contractual promise to assure  homeowners that the equity in their homes will be protected if they sell their homes and realize less than full value from the sale due to an environmental concern in the community.  A VAP promises to compensate those homeowners who sell (or have sold) their homes by paying them the difference between the property's sale price and its fair market value prior to the discovery of possible contamination.  As part of the arrangement, the company may also offer to reimburse the closing costs and the moving expenses of residents who leave the community.  Often, the reassurance that a VAP provides is successful in preventing the panic selling (the rush to the door) that often strikes communities shortly after public disclosure of an environmental problem. 

To implement a Value Assurance Plan, a company needs  creative lawyering and a consultant who has a strong understanding of the economic dynamics driving the property diminution claims and who can accurately assess the potential exposure to the company of taking alternative courses of action, including taking no action at all.  Two such high qualified consultants are Jerry Dent  at Alvarez & Marsal in Birmingham, Alabama, and  Dwight Duncan at EconLit in Phoenix, Arizona. 

Greenwashing” involves misleading consumers concerning the environmental benefits of a product or service. In the “Six Sins of Greenwashing,” TerraChoice a marketing firm, studied over one thousand consumer products and concluded that all but one made claims that were demonstrably false or misled consumers. TerraChoice found that eco-marketers were guilty of what it described as the “Six Sins of Greenwashing,” which include:

1. Sin of the Hidden Tradeoff
2. Sin of No Proof
3. Sin of Vagueness
4. Sin of Irrelevance
5. Sin of Fibbing
6. Sin of the Lesser of Two Evils

Are companies that mislead well-intentioned customers into making purchases that do not deliver their promise subjecting themselves to class action claims alleging deceptive trade practice and false advertising? More than ever before, sellers of consumer goods are committing the “Sin of Vagueness” (for example) by claiming that their products are “chemical free,” “non-toxic,” “all natural,” or “environmentally friendly.” If a purchaser is induced to purchase a pesticide product because it claimed in advertising to be “chemical free” or “non-toxic,” and becomes ill, would a product liability claim be less difficult to prosecute?  More significantly, will the “Six Sins of Greenwashing” give rise to false advertising and deceptive trade practice class action suits?  In the absence of regulation concerning eco-marketing, what standard will courts hold consumer product sellers to in evaluating these claims. In general, product sellers can obtain guidance from:  (1) standards established by multiple private certification groups; (2) “Green Guides” issued by the United States Federal Trade Commission; and (3) ISO 14021 and ISO 14024, which provide standards on how best to communicate environmental product information. Voluntary adherence to any of these standards or guidelines will certainly not preempt a class action, but may provide credible defenses to these claims.