In This Issue

• A Merchant Must Exercise Care When Excluding Implied Warranties
• Ohio Supreme Court Upholds Cap on Non-Economic and Punitive Damages
• Homeland Security Issues New Chemical Reporting Regulations
• The Enforceability of Arbitration Provisions in Consumer Contracts

A Merchant Must Exercise Care When Excluding Implied Warranties

By Ralph E. Breitfeller

The implied warranty of merchantability is imposed upon any selling merchant by statute:

As the language of the Code makes clear, the warranty is implied unless specifically disclaimed.

The warranty of fitness for a particular purpose is also imposed by operation of law unless specifically disclaimed:

Where the seller at the time of contracting has reason to know any particular purpose for which the goods are required and that the buyer is relying on the seller’s skill or judgment to select or furnish suitable goods, there is unless excluded or modified under section 1302.29 of the Revised Code an implied warranty that the goods shall be fit for such purpose.

The Uniform Commercial Code provides the methods by which an implied warranty may be excluded:

(B) Subject to division (C) of this section, to exclude or modify the implied warranty of merchantability or any part of it the language must mention merchantability and in case of a writing must be conspicuous, and to exclude or modify any implied warranty of fitness the exclusion must be by a writing and conspicuous. Language to exclude all implied warranties of fitness is sufficient if it states for example, that “There are no warranties which extend beyond the description on the face hereof.”

(C) Notwithstanding division (B) of this section:

(1) unless the circumstances indicate otherwise all implied warranties are excluded by expressions like “as is,” “with all faults,” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty; and

(2) when the buyer before entering into the contract has examined the goods or the sample or model as fully as he desired or has refused to examine the goods there is no implied warranty with regard to defects which an examination ought in the circumstances to have revealed to him; and

(3) an implied warranty can also be excluded or modified by course of dealing or course of performance or usage of trade; and

(4) with respect to the sale of livestock between merchants, except sales of livestock for immediate slaughter, both of the following apply:

(a) there is no implied warranty that the animal is free from disease.[;]

(b) there is an implied warranty that the seller has no knowledge or reason to know that the animal is not free from disease at the time of sale and that he has complied with all state and federal health rules applicable to the animal.

In the Thomas case, Mr. Thomas purchased a Toshiba laptop from Micro Center. The receipt he was given contained a notation that laptop computers may be exchanged or returned within seven days of purchase. Toshiba provided a one year warranty. Mr. Thomas also purchased an extended warranty from Butler Financial Solutions (not Micro Center). The extended warranty provided that, during any time period that the computer was covered by the manufacturer's warranty, any parts and labor covered by that warranty were the sole responsibility of the manufacturer.

Mr. Thomas’ computer began to malfunction shortly after purchase. There were repeated attempts to repair it by Toshiba and a repair contractor to whom Toshiba had directed Mr. Thomas. After seven months of unsuccessful repair attempts, Mr. Thomas demanded a replacement. Toshiba responded that it did not replace computers and instructed Mr.. Thomas to contact Micro Center. Micro Center responded that, because the computer was still covered by the Toshiba warranty, it was not obligated to replace it. Mr. Thomas sued Toshiba and Micro Center.

Micro Center moved for summary judgment and the trial court granted the motion without an opinion; Mr. Thomas then appealed. Although the Court of Appeals agreed with the trial court on several issues, the Court of Appeals reversed the trial court on the question of whether Micro Center had properly excluded the implied warranties.

The Court of Appeals held that the statement on Micro Center's receipt (i.e., "may be returned or exchanged within seven days") did not exclude the implied warranties. Moreover, citing another Ohio appellate court, the Court of Appeals held that Micro Center could not rely on Toshiba's exclusion of the implied warranties. The manufacturer's disclaimer does not run to subsequent sellers, and each seller must make their own proper exclusion of the warranties to be effective.

The lessons highlighted by the Thomas case are:
• A merchant seller needs to be aware of the implied warranties.
• A merchant seller needs to be aware that implied warranties can be excluded only according to the specific provisions of the Uniform Commercial Code.
• The merchant seller cannot rely on warranty exclusions of the manufacturer or any prior seller (wholesaler).

Implied warranties are not difficult to exclude, but care must be taken that the exclusion is done in a manner that complies with the Uniform Commercial Code.

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Ohio Supreme Court Upholds Cap on Non-Economic and Punitive Damages

By Katherine Connor Ferguson

Limits on non-economic damages:

• Non-economic loss includes pain and suffering, loss of society, disfigurement, mental anguish or any other intangible loss.

• Limits on non-economic damages apply to civil actions for injury or loss to person or property (including product liability actions), but do not apply to actions for breach of contract or other agreement, medical claims, dental claims, optometric claims or chiropractic claims.

• Plaintiff's recovery for non-economic loss is limited to the greater of (1) $250,000 or (2) three times the economic damages up to a maximum of $350,000, or $500,000 per single occurrence.

• The limits on non-economic damages do not apply if the plaintiff suffered “permanent and substantial physical deformity, loss of use of a limb, or loss of a bodily organ system,” or [p]ermanent physical functional injury that permanently prevents the injured person from being able to independently care for self and perform life-sustaining activities.”

Limits on punitive damages:

• Limits on punitive damages apply to civil actions for injury or loss to person or property (including product liability actions), but do not apply to actions for breach of contract or other agreement.

• Plaintiff’s recovery of punitive damages is limited to a maximum of two times the total amount of compensatory damages the plaintiff receives from each defendant.

• Punitive damages may be limited further if the defendant is a “small employer” or an individual. In that case, the punitive damages may not exceed “the lesser of two times the amount of the compensatory damages awarded to the plaintiff from the defendant or ten percent of the employer’s or individual’s net worth when the tort was committed, up to a maximum of $350,000."

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Homeland Security Issues New Chemical Reporting Regulations

By Charles J. Dyas, Jr.

On November 20, 2007, the Department of Homeland Security (DHS) issued final rules establishing chemical threshold standards triggering reporting requirements for any facility that manufactures, uses, stores or distributes a chemical identified on the DHS list. The purpose for the regulation is for DHS to compile information about any facility that has threshold quantities of the listed chemicals that may be considered attractive to terrorists.

Under DHS’s new regulations, any facility that manufactures, uses, stores or distributes a chemical that has been identified on DHS's “chemicals of interest” list and that exceeds the screening threshold quantity must conduct an analysis of the chemicals and facility and submit the information to DHS. DHS has estimated that around 40,000 facilities located in the U.S. will need to complete the initial analysis. The regulations not only apply to manufacturing facilities, but also apply to all colleges and universities, medical and health facilities, research facilities and laboratories, farms and agricultural industries.

DHS’s regulations identified the chemicals based upon any risk caused by the “release,” “theft” or “diversion” and/or “sabotage” or “contamination” of the listed chemicals at a facility. DHS also will consider the chemical if it is critical to a government mission or critical to the national economy. When a facility meets the threshold standards, they are required to submit the information to DHS within sixty days of coming into possession of any such chemical or sixty days from promulgation of the new regulations (January 19, 2008).

The threshold quantity of the chemicals of interests will be based upon the security issue involved. Each security issue sets forth a range of chemical quantities for determining the threshold amount. For example, the chemical threshold quantity for the release threat from toxic or flammable chemicals ranges from 500 to 20,000 pounds, depending on the toxicity and volatility of the chemical. Chemicals of interest that, if stolen, could be used for chemical weapons have a threshold quantity range between 100 grams to 220 pounds. The threshold quantity for chemicals of interest that, if released and considered explosive, is approximately 5,000 pounds. The calculation of the chemicals of interest for each facility is cumulative, which means that all amounts of the chemical at a facility are counted towards the threshold amount.

If a facility meets certain threshold standards, they will be required to conduct a security assessment known as a Security Vulnerability Assessment. The assessment must include asset characterization, threat assessment, security vulnerability analysis, risk assessment and counter measures analysis. Once the assessment is done, a facility must prepare a site security plan, which will be submitted to DHS for review and approval. Those facilities that meet the security criteria are required to complete and submit their site security plans within 120 days. Once approved, DHS will inspect each facility to ensure that the site security plan is being fully implemented before issuing a letter of approval.

The regulations are fairly complex and will require time to implement although, as with any federal, state or local regulation, compliance with the program is mandatory and the failure to comply may lead to the imposition of significant penalties. Therefore, any facility that manufactures, uses, stores or distributes a chemical identified on the list needs to determine the applicability of the regulations to the facility and implement procedures for complying with the regulations.

If you require additional information or assistance regarding the Division of Homeland Security’s new threshold chemical reporting requirements, please contact Chuck Dyas at 614-462-5496.

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The Enforceability of Arbitration Provisions in Consumer Contracts

By Natalie M. McLaughlin

A disturbing recent trend has arisen across the country in which courts are refusing to enforce arbitration provisions in some consumer contracts due to unconscionability. Recently, the court in Bayes v. Merle's Metro Builders/Boulevard Construction, LLC, 2007-Ohio-067, a case out of the 11th Appellate District of Ohio, followed this trend. The case cited other Ohio cases out of the 8th and 5th Appellate Districts that also have refused to enforce arbitration provisions in some consumer contracts.

In Bayes, a couple hired a contractor to add an addition to their home. The parties entered into a one-page standard contract that contained an arbitration provision requiring any controversy or claim to be arbitrated by the American Arbitration Association under its Commercial Arbitration Rules. Later a dispute arose, and the contractor advised that he would refer the matter to arbitration pursuant to the contract. In an attempt to avoid arbitration, the couple filed a complaint in the court of common pleas, which was then appealed. The couple alleged in the appeal that the arbitration provision was unconscionable.

The Ohio Supreme Court has held that, for an arbitration provision to be found unconscionable and therefore unenforceable, a court must determine that it is substantively unconscionable, meaning the terms are unfair and commercially unreasonable, and procedurally unconscionable, generally meaning that the parties did not have equal bargaining power, the terms were not explained to the weaker party and the stronger party drafted the contract. The court in Bayes found the arbitration provision in that case to be both substantively and procedurally unconscionable, and therefore unenforceable.
From the Bayes case, there are several important lessons to be learned in drafting consumer contracts that contain arbitration clauses:

(1) Make the arbitration provision conspicuous.

The court found it problematic that, even though this was just a one-page contract, so there was not much to read, the provision appeared towards the bottom and was written in the same small font size as the other provisions in the contract.

The language used in the arbitration clause in Bayes stated that “any judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.” The court found that most consumers would not equate this language with a waiver of their constitutional right to a jury trial and a waiver of their right to have the dispute determined by any court. To the contrary, it suggests to some extent that a court will at least have some jurisdictional review of the case.

The court took issue with the arbitration provision because it did not address the payment of these fees, which are not miniscule costs.

Though the contractor in this case reviewed the contract with the couple for about a half-hour and answered their questions on terms, he did not explain the arbitration provision to them.

The court found that the more standardized the agreement and the less a party may bargain meaningfully, the more susceptible the contract or a term will be to a claim of unconscionability. Even though the contractor testified that he would have permitted changes to the preprinted portions of the contract and that he had made changes lots of times to such preprinted contracts, he did not make this evident to the couple, and therefore, the court did not give this much credence.