Covering your assets: the importance of products liability due diligence when making an acquisition.

• Author: Goodman, Mark P.
• Position: Legal Brief - Brief Article

LITIGATION due diligence has always been an important part of the acquisition process, but it has never been more critical than it is today. Multimillion-dollar products liability verdicts have become routine, and plaintiffs' counsel have become increasingly well-funded, aggressive and inventive. In today's litigation environment, a company must be especially mindful that an acquisition target that is the apple of its eye does not contain a litigation worm that will ruin the investment.

For corporate board members, therefore, evaluating the quality of an acquisition requires not only a business analysis but comprehensive products liability due diligence. Targets with products liability exposure need not necessarily be avoided -- they may, for that reason alone, be undervalued, and a savvy buyer can turn a troubled target into a winning acquisition. The key for a board member is to fully understand the actual or potential liability -- not only the worst-case downside risk, but also the best-case upside potential.

Boards reviewing a potential acquisition target should have answers to the following questions:

1. What is the target's litigation history with regard to the product at issue? A review of the litigation history should focus on the number and quality of pending and potential future cases, the strength of the liability case against the target, the number and average value of settlements and verdicts, the sorts of injuries alleged by plaintiffs, the jurisdictions in which cases have been filed, whether the target has been held liable for punitive damages, and the way in which the target has managed the litigation. By analyzing these details, experienced counsel may be able to predict the most likely trajectory of the litigation, identify areas in which the target can save money on defense and/or indemnity costs, and propose strategies to structure the target's liability to provide higher levels of certainty and predictability.

2. What are the fact concerning the target's corporate conduct? At the outset, the acquirer's board should have an understanding of the product at issue and the context in which it was designed, manufactured and distributed. Important considerations include the product's intended function, its benefits, the alleged injuries, their susceptibility to treatment, and whether injury typically resulted from proper use or misuse of the product. The acquirer should also focus on when and how the product was manufactured...