Protecting Your CBD Business from Product Liability Lawsuits

By Michelle Bodian, Senior Associate Attorney

Mar 9, 2020

With any new consumer product craze, lawsuits will inevitably follow. The hemp-CBD industry is no exception.

The current wave of CBD-related lawsuits has primarily been product liability claims. As no company wants to find themselves on the receiving end of a lawsuit, there are some simple preventive steps you can take to help decrease the likelihood of this type of lawsuit and save money in the long run.

What is a Product Liability Lawsuit?

In the broadest terms, a product liability lawsuit is a type of lawsuit that typically involves injuries or harm caused by a product that is (alleged to be) defective in some way.

The most common product liability lawsuits are those that deal with false labeling. In this type of lawsuit, a product’s label states a certain percentage of CBD, e.g. 25% CBD. A consumer buys the product, tests the product, and finds out the amount of CBD is different (either more or less). The consumer then sues the seller of the product claiming a false label.

The second typical lawsuit involves a plaintiff (consumer) friendly state that allows a private cause of action (right to sue) for violation of federal law. For example, in this second category of lawsuit, a state adopts the Federal Food Drug and Cosmetic Act but instead of only allowing the government to sue for violations, the state allows any consumer who is injured to sue the company. The alleged injury in this type of lawsuit is that the sale of CBD to the consumer is the sale of an “illegal product.” The consumer’s best evidence, in this case, would be attached to a U.S. Food and Drug Administration (FDA) or state regulatory action enforcement letter stating that the product being sold violates the law.  

How to Minimize Exposure to Product Liability Lawsuits

While there are various tactics a company can do (or not do) to minimize its exposure to a product liability lawsuit, here are five quick and easy places to start:

1. Label your products accurately

  • It is crucial to know what is in your products and accurately represent that information on your product’s label.

  • Exactly what information needs to be displayed on such a label will depend on your CBD product type.

2. Obtain adequate insurance coverage

  • Product Liability

    • Product liability insurance protects a company against claims or suits arising from the company’s products, whether they were made by the company or sold by it. It also covers a manufacturer’s or seller’s liability for bodily injury or property damage sustained by a third party due to a product's defect or malfunction.

  • Commercial General Liability

    • Commercial general liability insurance is designed to protect you and your business from a loss if you are found legally liable for bodily injuries, property damage, certain personal injuries, and “advertising injury” to a third party caused by the CBD product you sell.

3. Have thorough and protective contract provisions

  • Indemnity provisions for all stages in the supply chain

    • Indemnification provisions allocate the risk and expense in the event of a breach or default by one of the parties to the contract. Having this defined in a contract will help pre-determine financial loss and may require the counterparty to compensate your company for any loss stemming from a lawsuit.

  • Requiring counterparties must obtain adequate insurance and name you as an additional named insured

    • Requiring a counterparty to maintain insurance will help cover any financial losses and ensure they can adequately cover any indemnity provisions.

    • Having a counterparty name you on their insurance policy will entitle you to the same coverage as the named insured (the counterparty) but you will not be responsible for any policy premiums.

4. React quickly and efficiently if you receive a notice of a lawsuit

  • As soon as you receive notice of a lawsuit (e.g., FDA enforcement letter, a letter from a state enforcement agency, the threat of a lawsuit from a consumer, etc.), you should line up defense counsel. The timing to respond to a lawsuit is often short, so it is best to have at least introduced your company to an attorney before actually being served with a lawsuit.

5. Be selective in which states your products are sold

  • As stated above, the second category of lawsuits only arises in certain states. It is important to know which states are more plaintiff (customer) friendly. For example, California and New Jersey are extremely pro-plaintiff. 

  • As a company, you should consider whether the financial or business gain in a pro-plaintiff state is worth the litigation risk.

The regulations surrounding CBD, combined with those for product liability make for an incredibly tricky industry to successfully and legally navigate. We advise that those who are concerned about their product liability risks to contact a knowledgeable attorney as soon as possible.  

 

This article is for informational purposes only and not for the purpose of providing legal or tax advice. You should contact your attorney to obtain advice with respect to any issue or problem.