Can You Avoid Avoidance … as a Risk Management Tool?

Avoidance is something that we all likely are guilty of when it comes to taking on unpleasant tasks, roles or responsibilities. Sometimes, however, avoidance can be a good thing for medical device firms. In the quest to manage product liability risks, avoidance is a recognized and legitimate business tool. Avoidance eliminates the odds of loss either by abandoning or never undertaking an activity or an asset.

Organizations using avoidance consciously decide not to engage in activities that present ponderous liability potential. Some consider avoidance to be an extreme approach to risk management. Admittedly draconian, it means terminating a product, or product line. It might mean deciding not to enter a certain market, representing lost opportunities. It is the most severe and radical of risk management techniques. Still, it has its place.

Medical and Non-Medical Applications

Medical device companies may decide that product liability headaches outweigh the benefits of carrying a product or product line. Manufacturers within and outside the medical device field utilize avoidance as a risk management tool. For example,consider the following scenarios:

• Only three companies manufacture football helmets, where there once were a half-dozen. Due to concussions, lawsuits, settlements and awards, the product liability risks are just too high for most sporting goods companies. They are practicing avoidance.

• Cessna stopped making small piston-engine aircraft, largely due to lawsuits from alleged plane defects, according to lawyer/engineer Peter Huber in his book, “Liability: The Legal Revolution and its Consequences.”

• A manufacturer of motorized scooters discontinued this line of mobility products, despite the fact that thousands of people depend on such runabouts for mobility. The cost of one lawsuit, however, negated all the profits garnered from that product line.

Some manufacturers are skittish about entering the infant sleep apnea monitor business. Lawsuits alleging alarm failures trigger multi-million-dollar claims. Consider that doctors prescribe these monitors for neonates already at risk and susceptible to sudden infant death syndrome.

In addition to avoiding product lines for liability reasons, product liability worries can make or break decisions relating to prospective mergers and acquisitions. While considering a merger or acquisition, the acquiring company performs a “due diligence” assessment of the target organization. Checking for potential environmental and pollution liabilities has long been standard. Increasingly, however, corporate sleuths search for skeletons in the product liability closet. Thus, product liability worries can derail many corporate reorganizations.

Deterrence against developing new products or product lines constitutes another form of avoidance. More difficult to measure are cases where companies opt not to enter a product line due to liability fears. This, in effect, is a type of avoidance. Currently, for example, few American companies manufacture intrauterine devices (IUDs). Litigation fallout from A.H.
Robins’ Dalkon Shield and G.D. Searle’s Copper-7 may have deterred companies from manufacturing IUDs. (Author’s note: As of this writing only two IUDs—the ParaGard and the Mirena—are approved for use in the United States.)

Many firms have decided that entering what they view as a civil justice “lottery sweepstakes” is a poor gamble. They have opted to drop out by eliminating a product or product lines, reverting to tried and true technologies in areas not fraught with liability peril.

Tips for Analyzing Avoidance

When considering avoidance as a risk management tool, device companies may weigh the following considerations:

1. Will competitors fill the void, gaining a foothold? Analyze your market to see if the void you create will be filled quickly by competitors gaining a toehold in your turf. In this respect, risk management concerns may have to yield to the bigger business picture.

2. Is the product inextricably tied to the corporate identity? Or, is it somewhat peripheral? A company, for example, that dominates the patient mobility market may be hard-pressed simply to announce that it will cease manufacturing wheelchairs. Even if such a decision made sense in a narrow financial context, this may erode a firm’s identity as a market leader.

3. Do profits for the device or product line outweigh the costs? If so, the rational decision would be to keep the product and seek less drastic alternatives for addressing risk. These might include insurance, self-insurance, rigorous loss prevention, and—ideally—a combination of all three.

Product liability costs include:

• Product liability insurance premiums;

• Uninsured defense and claimexpenses;

• Management time spent dealing with case defense, interrogatories, deposition, “needle in the haystack” document searches, and the time-consuming tasks that lawyers may require you to do in defending a claim; and

• Lost sales due to adverse publicity, heightened by the black eye and stigma of fending off liability claims.

Adding all these components produces a “cost of risk” assessment for each company. Armed with this and production figures, companies can formulate a risk cost per unit to compare with profit per unit. This quantitative approach is an analytical tool, which can help medical companies decide whether, from a financial standpoint, avoidance makes sense as a risk management and business technique.

4. Will the decision to drop the product come back to haunt you in pending or future litigation? Check with a product liability defense lawyer.

In some jurisdictions, removing a product from market is known as a “post-loss remedial measure” and may be admissible in court. Despite evidentiary rules against the admissibility of these types of measures in court, plaintiff attorneys may fight to introduce them at trial and may sometimes succeed. The plaintiff’s argument may be, “The product was so bad, they took it off the market.” Plaintiff attorneys can use this to pry punitive damages from you in the millions of dollars. Even in courts where post-loss remedial measures are inadmissible, clever plaintiff attorneys can find creative ways to introduce the fact that you’ve dropped the product line, and may try to portray that as an admission of guilt.

The remedy? Seek the advice of competent legal counsel. Weigh the impact of the decision on pending and future claims. Anticipate legal arguments to limit disclosure of this fact. Develop responses to the inevitable argument that you removed it from the market as an admission of defect.

5. Cover your “tail” for slow-developing liabilities. You still may need coverage even if you drop a product or product line. Dropping a product line does not necessarily mean that you will drop lawsuits. It may take years for a claim to develop. In that case, lawsuits can arrive long after you have divested yourself of a particularly troublesome product or product line. It likely will be many years before you are in the clear. How long that will take may equal the life expectancy of your most durable product. If you sell a product line to another company, some courts have still found “successor liability.” As a result, you may still need to carry “long tail” liability coverage for years after ending production or sale.

The upshot: Ending a product or product line does not necessarily end the need for insurance on that product. Malfunctions can occur, patients can be injured and claimants can file claims years after you drop or sell a product line. To avoid potential financial catastrophe, you still may need insurance coverage to handle this contingency. Hence, if the need for insurance is driving the decision to avoid a risk, do not think that your problems are automatically over the moment you discontinue a product line. Dropping a product line may not necessarily end your potential for claims. In the long run, it may reduce the potential.

Avoidance is a drastic step, in many cases a last-ditch effort when all other tactics—retention, loss control and insurance—have fallen short of the mark. Medical device firms may find that they can run but they can’t hide from product liability risk. Admittedly, avoidance is not for everybody, but it does have its place in any company’s risk management toolbox as an option to consider.

Kevin Quinley is vice president, Risk Management Services for Berkley Life Sciences, LLC. Berkley Life Sciences LLC is a leading provider of insurance for the life-science industry. The views expressed here do not constitute legal advice, are those of the author alone and do not necessarily reflect those of Berkley Life Sciences or its customers. You can reach Kevin at [email protected].