Impact of Product Recalls

What is a product recall?

A product recall occurs when the manufacturer or a regulatory agency removes a product from the market or asks the public to return the product for corrective measures. Most product recalls relate to safety issues. A voluntary recall occurs when the manufacturer asks consumers to return the product or bring it in for repairs. A mandatory recall is a recall ordered by a regulatory agency pursuant to a law or regulation.

Authority to recall products

There are numerous federal agencies that have authority to recall products. These include the Consumer Product Safety Commission (consumer products), the Food and Drug Administration (food, drugs, medical devices, and cosmetics), the Federal Trade Commission (mobile homes, heat pumps, solar furnaces, and motor vehicles), and the National Highway Traffic Safety Administration (vehicle safety).

Manufacturer’s duty to warn

As a general rule, a manufacturer has a duty to warn of a latent defect (a defect that existed at the point of manufacture), which was discovered after the sale but that was not discoverable by either the manufacturer or the consumer at the time of the sale. Most courts hold that a manufacturer does not have a duty to retrofit a product that was not defective when it was sold.

Products liability defect vs. regulatory defect

In products liability law, a defective product means that the product has an inherent flaw or was improperly manufactured, or that the manufacturer failed to warn or inadequately warned of the dangers associated with using the product. A regulatory defect is not the same thing as a products liability defect. For regulatory purposes, a product is considered defective if it creates a substantial hazard to the consumer.

Costs of product recalls

Companies incur substantial costs in recalling a product. Recall notices, repairs, refunds and replacement products are the direct costs of a recall. Loss of consumer good will and the potential for product liability lawsuits are indirect costs. The value of the company’s stock can also decrease after a recall announcement.

Effectiveness of product recalls

It is often difficult for the manufacturer to identify which consumers need to be notified of a product’s recall. If the recall were not as effective as it might have been, an injured consumer might have a stronger case for holding the manufacturer liable for the consumer’s injuries. If the manufacturer can show that it made every effort to get back the defective products, it will have a strong defense in a products liability lawsuit.

Several factors are considered in determining the effectiveness of a product recall:

• Was the manufacturer adequately prepared for a recall campaign?
• Could the manufacturer reach product holders?
• Was the recall notice effective? Did it motivate consumers to return the product?
• What percentage of the recalled products was recovered?
• What did the manufacturer do to repair or replace the product?

Copyright 2012 LexisNexis, a division of Reed Elsevier Inc.