Preemption (pree-emp-Shen), n. The principle (derivedfrom the Supremacy Clause) that a federal law can supersede or supplant anyinconsistent state law or regulation.

In a very recent 6-3 decision, turning on federal preemption of state law, theSupreme Court held in Wyeth v. Levine that state law consumer safety tortclaims are not preempted by the Federal Drug Administration’s approval of awarning label for the drug and regulations prohibiting changing the label toconform with state law.

In Wyeth, a Vermont jury found that the petitioner, Wyeth, the manufacturer ofthe drug Phenergan, had failed to provide an adequate warning of the riskinjecting the drug via “I.V.-push method” and awarded damages to Diana Levineto compensate her for the infection, and subsequent amputation of her arm. Thejury determined that Levine’s injury would not have occurred if Phenergan’slabel included an adequate warning. Notably, the label clearly warnedpractitioners to use "extreme care" when injecting the drug andexplaining that resultant gangrene requiring amputation are likely” to occurwith the IV-push method.

Wyeth’s attorney’s argued that Levine’s failure-to-warn claims were preemptedby federal law. Phenergan’s labeling had been approved by the FDA. The SupremeCourt rejected Wyeth’s arguments, holding that the agency’s “changes beingeffected” (CBE) regulation permits certain pre-approval labeling changes thatadd or strengthen a warning to improve drug safety, and there was no evidenceto suggest the FDA would have denied Wyeth's request to include a strongerwarning label. The Court also held that requiring Wyeth to comply with astate-law duty to provide a stronger warning does not interfere with Congress’purpose of entrusting an expert agency with drug labeling decisions because thehistory of the FDCA shows that Congress did not intend to preempt state lawfailure-to-warn actions.

In his dissent, Justice Alito noted, “This case illustrates that tragic factsmake bad law.” The jury was presented with the injury to the Plaintiff and notthe benefits to the untold numbers of individuals helped by the drug. Accordingto Justice Alito, “the real issue is whether a state tort jury can countermandthe FDA’s considered judgment that Phenergan’s FDA-mandated warning labelrenders its intravenous (IV) use ‘safe.’” Justice Alito’s dissent urged thatthis case represents, at most, a medical-malpractice claim, and should not be a“’frontal assault’ on the FDA’s regulatory regime for drug labeling” upsetting“the well-settled meaning of the Supremacy Clause and conflict pre-emptionjurisprudence.”

Some see this case as representing a potential increase in products liabilitycases against drug manufacturers. Whereas previously manufacturers could sell adrug with FDA approval under the assumption that the approval provided themsome liability protection, this case has the effect of nullifying thisprotection. Others see this case as a “strategic loss” for the drug companies .However, a ruling by the Supreme Court giving drug companies federal immunityfrom suits under state laws could have provoked a drastic, and worse, responsefrom the Democrat-controlled Congress. 

Virginia is in the minority of states that generally permit parties to be contractually indemnified for their own negligence, as long as the provision is clear and explicit.   In 2007, the Virginia Supreme Court upheld contractual indemnification clauses which shift the burden of liability to the indemnitor, even though the injury was the fault of the indemnitee.  Estes Exp. Lines, Inc. v. Chopper Exp., Inc., 273 Va. 358, 641 S.E.2d 476 (2007); W.R. Hall, Inc. v. Hampton Roads Sanitation Dist., 273 Va. 350, 641 S.E.2d 472 (2007).

In Estes Exp. Lines, Inc. v. Chopper Exp., Inc., a Chopper employee was injured while operating a truck leased from Estes.  The employee filed a personal injury action against Estes and a repair company on the basis that their negligence was the proximate cause of his injuries.  The parties settled their claims and, Estes then requested that Chopper reimburse it for the settlement amount and attorneys' fees in reaching settlement pursuant to the indemnification clause in the lease agreement.  Chopper had agreed to indemnify Estes for:

C. Any and all loss, cost, claim, expense, cause of action, loss of use and liability by reason of injury (including death) to persons or damage to property arising out of the use, operation, ownership, maintenance or control of a [leased] Vehicle whether covered by insurance or not, including claims in excess of insurance limits and all claims determined not to be covered by insurance irrespective of who, among [Chopper] or its insurance carrier or others, may be the cause for such failure of coverage or recovery in excess of coverage.

D. Any liability by reason of any claim asserted by an agent or employee of [Chopper].

Chopper refused, and Estes filed suit. 

The Virginia Supreme Court stated that indemnity provisions, including those indemnifying a party against future liability for personal injury caused by its own negligence, do not invoke the same public policy concerns as pre-injury release agreements.  The primary reason for this distinction is that, unlike pre-injury release provisions, indemnity provisions do not bar or even diminish an injury party's ability to recover from a tortfeasor.  The Court found that the indemnification was enforceable even to the extent that it would entitle Estes to be reimbursed for its own negligence.

On the same day as it rendered its Estes opinion, the Virginia Supreme Court issued its opinion in W.R. Hall, Inc. v. Hampton Roads Sanitation Dist.  In this case, the Hampton Roads Sanitation District (“HRSD”) hired W. R. Hall, Inc. to replace sewer lines.  W. R. Hall’s employee was injured when a train hit him.  The employee sued Belt Lines.  HRSD assumed Belt Line’s defense pursuant to the utility line agreement between them.  HRSD then sought indemnity from W. R. Hall for its expenses incurred in defending Belt Line under two indemnity provisions in favor of HRSD.

Article 6.16 specified that W. R. Hall

Shall assume full responsibility for any damage to any such land or area [on which the work is to be done], or to the owner or occupant thereof.  [W.R. Hall] shall indemnify and hold harmless [HRSD] from and against all claims . . . brought by any such owner or occupant against [district] to the extent caused by or based upon [W. R. Hall’s] performance of the Work.

Article 6.31 required W. R. Hall to indemnify and hold harmless HRSD against any claim or loss for bodily injury "arising out of or resulting from the performance of the Work," provided that the claim or loss was caused in whole or in part by any negligent act or omission of W. R. Hall regardless of whether or not caused in part by any negligence or omission of a person or entity indemnified.  The Court noted that this provision operates to place the ultimate burden for  personal injury upon the negligent party causing said injury.

The Virginia Supreme Court found both Articles enforceable. The Court found that HRSD held harmless Belt Line against the consequences of its operations.  HRSD then sought to transfer that risk to the entity actually performing the operations (i.e. W. R. Hall) using Article 6.16.  The Court held that this transfer of risk to the active party is not repugnant to public policy.  Similarly, Article 6.31 sought to place the ultimate burden for a personal injury upon the negligent party causing that injury, but only if the indemnitor was at least in part responsible for the injury.  Consistent with Estes, the Court held that a contractual provision whereby a party is indemnified against losses incurred as a result of personal injury caused by its own future negligence is enforceable and does not violate public policy.

It is important to ensure that clients doing business in the Commonwealth of Virginia are clear about the language of the agreements in these cases and indemnification agreements in their own contracts.  While the indemnification language in these cases may not be suitable for the needs of all clients, it provides an important foundation for creating indemnification language in other contracts.  Moreover, when a client is faced with potential liability, an understanding of the language in these cases proves important in recognizing whether a clients’ current contract will exempt them from (or expose them to) liability.

I find it important to note, however, that Virginia does have a statutory limitation on indemnification of one's own negligence specifically for construction contracts.  VA. CODE. ANN. § 11 4.1.  Otherwise, pursuant to Estes and W.R. Hall, there is no public policy in Virginia that prohibits a party from negotiating away its own negligence in indemnity agreements.

Kevin M. Cox
Semmes Bowen & Semmes
kcox@semmes.com

The products liability litigation arena has recently seen an influx of overseas production processes litigation. Last year’s massive recalls on products such as children’s toys and pet food are just a two examples of the growing trend. Insurance defense practitioners are beginning to realize the impact of such litigation and that massive and expensive product liability claims based on overseas production are a new reality.

A recent decision, Ace American Inc. Co. v. RC2 Corp., 568 F. Supp. 2d 946 (N.D. Ill. 2008), focuses on insurance coverage in these circumstances, addresses issues that products practitioners need to know, and holds that an insurer has a duty to defend its insured in suits arising out of product recalls of products made outside of the United States if included in the coverage territory. In RC2 Corp., a federal district court judge for the Northern District of Illinois, applying Illinois law, held that an insurer has a duty to defend its insured, a toymaker, in suits arising out of the product recalls. The policyholder was sued by parents of children in the United States, alleging various theories of exposure and harm from toys contaminated with lead paint that were made in China, but sold in the United States. The insurer issued four successive liability insurance policies to the policyholder, the maker of the toys. Each of the policies stated that "the 'occurrence' must take place in the 'coverage territory.'" The coverage territory provision included "all of the world outside of the United States." After the policyholder sought coverage for these underlying actions, the insurer denied that it had a duty to defend or indemnify the insured because, inter alia, of the coverage territory of the policies.

In addressing the coverage territory issues, the court stated that what constituted the relevant "occurrence" for purposes of a coverage territory provision was a matter of first impression under Illinois law. The court rejected the insurer's argument that coverage was barred because the harm for which the underlying plaintiffs sought redress took place in the United States. The court reasoned that "[t]he language of the [policies] refers to Harm that is "caused by an 'occurrence'" and that "here the occurrence is separately identified as being the cause of the Harm" and that the "Harm is not itself part of the occurrence." The court further reasoned that "[t]he language is written in the positive" so that:

For there to be coverage, the occurrence must take place in the coverage territory. It is not required that the Harm take place in the coverage territory but only during the Policy Period. In this situation, the occurrence took place in the coverage territory of China. By contrast, if the provision had been written in the negative, the result could be different. If there had been an exclusion providing that there is no coverage for Harm that took place inside the United States, then the case would fall under such exclusion.

Though the court found against the insurer in this case, the court did direct litigators and insurers as to how to prevent such a costly occurrence from reoccurring. For insurers of overseas product manufacturers to prevent similar coverage disputes from being brought in the future, insurers should include exclusions in their policies providing that there is no coverage for harm, bodily injury, and/or damages that occur inside the United States. In this case, such simple language may have prevented costly litigation and saved millions of dollars.