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California's Application of Strict Products Liability to the Hybrid Enterprise

July 1, 2009

By: Friedrich W. Seitz

IADC Committee Newsletter

In a recently published opinion of the California Court of Appeals, Ontiveros v. 24 Hour Fitness USA, Inc., 169 Cal.App.4th 424 (2008), the court reiterated and further clarified the application of strict products liability to “hybrid enterprises”; those enterprises that provide both products and services.

Extension of the Strict Product Liability Doctrine
As announced in Greenman v. Yuba Power Products, Inc., 59 Cal.2d 57 (1963), it is the general rule that “[a] manufacturer is strictly liable in tort when an article he places on the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury to a human being.” Id., at 62. Over the years, the progeny of cases following Greenman have extended the doctrine of strict products liability to almost anyone identifiable as “an integral part of the overall producing and marketing enterprise.” Vandermark v. Ford Motor Co., 61 Cal.2d 256, 262 (1964). Traditionally, a defendant has been considered a sufficient participant in the overall producing and marketing enterprise when: “(1) The defendant received a direct financial benefit from its activities and from the sale of the product;(2) The defendant’s role was integral to the business enterprise such that the defendant’s conduct was a necessary factor in bringing the product to the initial consumer market; and (2) The defendant had control over, or a substantial ability to influence the manufacturing or distribution process.” Bay Summit Community Association v. Shell Oil Co., 451 Cal.App.4th 762, 775 (1996).

With these principals in mind, California courts have applied the doctrine of strict products liability to others involved in the vertical distribution of consumer goods, including, lessors of personal property, wholesale and retail distributors, and licensors. Price v. Shell Oil Co., 2 Cal.3d 245, 252 (1970). Although not directly involved in the manufacture or design of the final product, these defendants have been deemed instrumental in distributing the product to the consuming public. Id.

The extension of products liability is not, however, without limit and various well-recognized exemptions have been created. For example, defendants engaged in supplying a service, as opposed to a product, are not considered within the chain of distribution and, thus, not subject to strict products liability. Pierson v. Sharp Memorial Hospital, Inc., 216 Cal.App.3d 340, 344 (1989) (a hospital, as a provider of professional medical services, is not strictly liable for defective carpet in a hospital room). While it is generally recognized that the doctrine is inapplicable to service providers, uncertainties arise where the defendant is a “hybrid enterprise”; an enterprise that furnishes both products and services. In such a scenario, liability will generally depend upon the dominant purpose of the enterprise.

Application of Strict Products Liability to Mixed Purpose Transactions
    A. The Dominant Purpose Approach
Presented with the question of whether to hold a pharmacist strictly liable for the sale of a prescription drug, the California Supreme Court was made to decide whether the role of the pharmacist is more akin to a retailer or a service provider. Murphy v. E.R. Squib & Sons, 40 Cal.3d 672 (1985). In analyzing this issue, the court expressed approval of the distinction drawn in Magrine v. Kransnica, 94 N.J. Super. 228 (1967) wherein the court stated:

“The essence of the transaction between the retail seller and the consumer relates to the article sold. The seller is in the business of supplying the product to the consumer. It is that, and that alone, for which he is paid. A dentist or physician offers, and is paid for, his professional services and skill. That is the essence of the relationship between him and his patient.”

Recognizing that a pharmacist is clearly engaged in a “hybrid enterprise,” combining the sale of prescription drugs with the performance of a service, the California Supreme Court found that a critical distinction between a pharmacist and an ordinary retailer is that only a licensed pharmacist may dispense prescription drugs. Moreover, as defined by the California Legislature at Business & Professions Code § 4046, “the practice of pharmacy is not only a profession (subd. (a)), but also a ‘dynamic patient-oriented health service that applices a scientific body of knowledge to improve and promote patienthealth by means of appropriate drug use and drug related therapy.’” Id., at 679 (emphasis added).

Finally, a pharmacist “cannot offer a prescription for sale except by order of the doctor.” Id. In essence, the pharmacist “is providing a service to the doctor and acting as an extension of the doctor in the same sense as a technician who takes an x-ray or analyzes a blood sample on a doctor’s order.” Id. Hence, in Murphy, the transaction between the phaarmacist and the plaintiff was deemed to be a service, effectively immunizing the pharmacist from strict liability for defects in the drug.

Subsequently, the Third District Court of Appeal was asked to apply this rationale in a less obvious context, the non-professional transaction. Ferrari v. Grand Canyon Dories, 32 Cal.App.4th 248 (1995). In Ferrari, plaintiff was injured on a raft while participating in a five-day rafting trip sponsored by defendant. Plaintiff sought to impose strict products liability on the rafting company claiming that defendant was a “lessor” of the raft. In support, plaintiff relied upon Garcia v. Halsett, 3 Cal.App.3d 319 (1970) wherein a laundromat owner was found strictly liable for injuries caused by a defective washing machine. There, although the defendant was not involved in the distribution of the product, the court found it significant that similar to a manufacturer, retailer or lessor, the owner did make the product available for use by the consuming public. Consequently, the court reasoned that defendant played “more than a random and accidental role in the overall marketing enterprise of the product in question.” Id., at 326. For this reason, strict products liability was deemed appropriate.

In distinguishing Garcia, the Ferrari court noted that unlike the defendant in Garcia, defendant rafting company provided more than a raft; they provided a service, i.e., recreational raft transportation on the Colorado river. Ferrari, supra, 32 Cal.App.4th at 259. Guided by the dominant purpose approach, the Ferrari court declined to impose strict liability on defendant rafting company finding that use of the raft was merely an incident to the overall services provided by defendant. Id. In this regard, defendant “provided all materials for the trip, instructions on rafting safety, and guides to perform the labor and conduct the activities.” Id.

Most recently, in Ontiveros v. 24 Hour Fitness USA, Inc., 169 Cal.App.4th 424 (2008), the Second District Court of Appeal relied upon the dominant purpose test in granting summary judgment for defendant fitness center on plaintiff’s strict products liability claims for injuries sustained while exercising on a stair step machine. Conceding that the facts before it were less compelling than in Ferrari, the court found that no triable issues of fact existed and that the dominant purpose of plaintiff’s membership agreement with defendant fitness center was the provision of fitness services and not the provision of a product, i.e., the allegedly defective exercise equipment. Id., at 434. Specifically, the undisputed evidence demonstrated that plaintiff’s membership agreement entitled her to the use of exercise equipment in addition to other fitness activities, including, aerobics, dance classes, and yoga. Id. Her membership also gave her access to testing centers where she could check her blood pressure and weight. Id. On appeal, plaintiff argued that triable issues of fact existed concerning the dominant purpose of plaintiff’s transaction with plaintiff. In particular, plaintiff claimed that she obtained her membership with defendant for the sole purpose of using defendant’s exercise equipment and that plaintiff did not utilize any of plaintiff’s other fitness services. In rejecting this argument, the reviewing court stated:

“that plaintiff chose not to avail herself of the services provided under her membership agreement does not change the essential nature and purpose of that agreement because it is the terms of her agreement, rather than her subjective intentions, that define the dominant purpose of her transaction with defendant. There is no evidence that plaintiff ever explained to defendant that she only wanted to use its exercise machines, not its services, or that the mutual intention of the parties was to exclude such services. Her uncommunicated subjective intent in that regard is therefore irrelevant.” Id.

As illustrated above, the string of cases following Garcia have declined to extend the court’s ruling beyond the specific facts therein and instead have consistently found strict products liability inapplicable to the hybrid enterprise. These cases, stamped by the most recent decision in Ontiveros, provide persuasive authority for defending a claim of products liability in the mixed purpose transaction.