Liability of Standards Development Organizations: A Response to Professor Heidt

Introduction

I have been asked to write a short response to Professor Heidt’s article, Damned for Their Judgment: The Tort Liability of Standards Development Organizations, which appeared recently in the Wake Forest Law Review.^[1]  In this article, Professor Heidt criticizes several decisions upholding damage awards to injured consumers against the National Spa and Pool Institute (“NSPI”).  Professor Heidt argues that these cases are wrongly decided on both doctrinal and policy grounds.  My response would probably be more interesting if I completely disagreed with Professor Heidt.  But, after reading his excellent article, I am persuaded that Professor Heidt’s position is essentially correct.

I.  The Social Value of Independent Standards
Development Organizations

Professor Heidt makes a compelling argument that independent standards development organizations serve a useful function in society and therefore ought to be protected against excessive tort liability.  Unlike industry trade associations, which sometimes promulgate self-serving standards, independent standards development organizations require that their standards be technologically up to date, that they be formulated in a transparent manner, and that they reflect the consensus view of many different groups.  For example, according to Professor Heidt, the American National Standards Institute’s (“ANSI”) standards development procedures:

[C]all for eliciting the views of all interested parties before any standard is proposed, forbid any single interest group from constituting a majority of any body dealing with standards, require wide distribution of a proposed standard followed by a lengthy period for public comment, insist that a record be made of any objections, and further insist that a single such objection automatically reach the eyes of the ANSI Board of Standards Review. ^[2]

Standards that comply with ANSI procedures provide a technical foundation for many kinds of commercial transactions.  In particular, ANSI compliant standards often provide technical information about complex products, services, or activities in a form that is accessible to their intended audience.  Furthermore, when the standards are credible, the builders, producers, retailers, and others who must evaluate quality and safety can rely on them without having to incur the expense of an independent evaluation.  Finally, because these standards promote the flow of information within an industry, they facilitate competition by reducing information asymmetries and other entry barriers.  As Professor Heidt points out, the information contained in a private standard is essentially a public good.^[3]

II.  The Chilling Effect of Tort Liability on Standards Development Organizations

Professor Heidt maintains that tort claims threaten the financial viability of standards development organizations.  He supports this conclusion by describing the experience of the National Spa and Pool Institute (“NSPI”), a private trade association which developed suggested minimum standards for swimming pools.  Plaintiffs who were injured diving into pools meeting NSPI standards have successfully sued NSPI for millions of dollars.  One multi-million dollar damage award, affirmed by a Washington appellate court in Meneely v. S.R. Smith, Inc.,^[4]  forced NSPI to declare bankruptcy in 2000.^[5] Shortly after being discharged from bankruptcy, NSPI was forced to seek bankruptcy protection once again.  By 2002, NSPI was facing more than $50 million in potential tort liability.^[6]

Professor Heidt discusses two cases in which courts allowed injured swimmers to sue NSPI for promulgating negligent standards.  In the first case, King v. National Spa and Pool Institute, Inc., the decedent suffered a broken neck after diving off a diving board into a Type II swimming pool.^[7]  The decedent’s personal representative brought suit against NSPI, alleging that NSPI was negligent in promulgating a standard that permitted the construction of a diving board in the plaintiff’s pool.  The Alabama Supreme Court, relying on a provision of the Restatement (Second) of Torts,^[8] held that NSPI undertook a duty that would otherwise be owed by the pool builder to the decedent when it promulgated the standard in question.^[9] In addition, the court concluded that § 324A(c) applied because NSPI knew that the contractor would rely on its standards when building the pool.^[10]

The second case, Meneely v. S.R. Smith, Inc., upheld a damage award against NSPI under Washington’s “voluntary rescue” doctrine.^[11]  The “voluntary rescue” doctrine, which is similar to the Restatement’s undertaking approach, provides that one who undertakes, even gratuitously, to render services to another owes a duty of reasonable care to that person.^[12] The Meneely court held that NSPI’s promulgation of pool standards amounted to an undertaking that was sufficient to impose a duty of care toward all users of pools that conformed to these standards.^[13]

Professor Heidt also discusses the experience of the American Association of Blood Banks (“AABB”), a quasi-governmental organization that establishes standards for the screening of blood donors.^[14]  Plaintiffs who received transfusions from HIV-contaminated blood alleged that AABB’s standards for donor screening were inadequate.  The plaintiffs argued that AABB was negligent because it failed to adopt a standard that would have required blood banks to test donors for hepatitis B and other conditions that put them at high risk for having HIV-infected blood.  In many of these cases, the appellate courts imposed a duty of due care on AABB and refused to recognize any sort of qualified privilege in connection with its standard setting activities.^[15]

Snyder v. Am. Ass’n of Blood Banks (“Snyder II”), decided by the New Jersey Supreme Court in 1996, focused on whether AABB was negligent for not responding more quickly to the foreseeable risk of harm from transfusions of HIV-infected blood.^[16]  In evaluating the reasonableness of AABB’s conduct, the New Jersey court emphasized the severity of HIV infections.  Finally, the court concluded that AABB owed a duty of care because its standards had a great influence on the screening practices of blood banks.^[17]  Fortunately for AABB, its liability exposure was limited because the risk of HIV infection attributable to its screening standards only lasted from January 1983 until March 1985, when the FDA approved a blood test for AIDS, thereby obviating the need to surrogate test blood donors for other conditions.^[18]

Professor Heidt is rightly critical of these decisions.  First, they are suspect on doctrinal grounds.  For example, both King and Meneely rely on the traditional rule, codified in the Second and Third Restatements, that one who voluntarily undertakes to rescue a person in peril assumes a duty to exercise due care in carrying that rescue.^[19]  But, these cases take a rule which arises between the actor and the person he or she sets out to rescue, and transform it into a rule which creates a duty of due care to a large and indeterminate segment of the general public.  Thus, the duty arises from general activity instead of a voluntary undertaking directed at a specific person or small group of people.  Snyder II also takes an expansive view of the duty requirement.^[20]  Under Snyder’s reasoning, one apparently owes a duty to exercise due care on behalf of anyone who is injured, but only when his conduct is found to be negligent.  Thus, merely by promulgating a voluntary standard which blood banks are encouraged to follow when screening donors, AABB assumed a duty of due care toward hundreds of thousands of unknown future blood transfusion recipients who were subsequently infected by the HIV virus.

King, Meneely and Snyder II can be criticized on policy grounds as well.  Professor Heidt contends that independent standards development organizations increase social utility and, therefore, ought to be protected and encouraged.  However, the sort of open-ended tort liability that was imposed on these organizations in King, Meneely and Snyder II threatens their financial viability.  Clearly, there will be a loss to society if organizations cease to develop standards or substantially cut back their standards development activities.

Of course, inadequate standards also cause losses to society in the form of personal injuries and economic losses. The issue, therefore, is whether the social losses from tort liability exceed the losses to society from inadequate standards.^[21]  Nevertheless, while it is impossible to calculate tort law’s social gains and losses with mathematical precision, I believe that the losses from imposing tort liability on standards development organizations are likely to outweigh any gains from higher standards.  First, the social losses, though hard to quantify, will almost certainly be substantial.  As the experience of NSPI demonstrates, imposing tort liability on standards development organizations can literally drive them out of business, thereby depriving their clients, as well as the general public, of the benefits of having well-drafted and up-to-date standards to guide a particular business or industry.

On the other hand, the social utility of tort liability is likely to be minimal for several reasons.  First, non-profit organizations, like standards development entities, do not respond to economic stimuli in the same manner as for-profit institutions.  Assuming arguendo, that their standards development process is deficient in some respect, and therefore produces marginally inadequate standards, instead of encouraging these organizations to formulate better standards, the prospect of substantial tort liability may simply cause them to abandon their standards development activities altogether.  In addition, holding standards development organizations liable for the negligent acts of others weakens the deterrent of tort liability by diffusing financial responsibility for negligent behavior.  If a diver is injured because a swimming pool is negligently constructed, the “cheapest cost avoider” is the building contractor, not the standards development organization.^[22]  Imposing tort liability on the standards setter has, at best, a marginal effect on safety; its primary purpose, and a dubious one at that, is to provide a deep pocket for accident victims.

III. Proposals and Counter-Proposals

Acknowledging that standard developers are not subject to government oversight and often act as agents for the industries they serve, Professor Heidt offers a qualified privilege for standard developers as an alternative to complete immunity from tort liability.^[23]  Under this approach, a standard developer would only be held liable for “bad faith” behavior and would be exonerated if it acted in “good faith.”  The plaintiff would have the burden of showing bad faith and this would be a jury issue in most cases.  Although Professor Heidt does not define bad faith, he declares that “a standard developer’s unexplained failure to follow the well-accepted ANSI procedures in adopting a standard” might constitute evidence of bad faith.^[24] On the other hand, evidence of good faith might be based on the fact that a standards developer, when faced with various alternatives, “weighed the competing policy considerations and made a conscious choice.”^[25]  Professor Heidt likens his proposed qualified privilege to the discretionary function exception to the Federal Tort Claims Act’s waiver of federal sovereign immunity.  However, it seems to more closely resemble the constitutional privilege of defamation law, where the plaintiff alleges the elements of defamation; the defendant responds that the plaintiff is a public official or a public figure; and the plaintiff attempts to defeat the constitutional privilege by showing that the defendants acted with actual malice.

At first blush, the qualified privilege option seems like a good compromise between the present liability rule which imposes an unreasonable excessive burden on standards development organizations and a “no duty” standard that would effectively immunize them from liability regardless of the inadequacy of their standards.  Indeed, it may be the only option that is politically realistic.  Nevertheless, I believe that this approach may not give sufficient protection to these organizations.  The first problem with a qualified privilege is that the existence of the privilege depends almost entirely on questions of fact.  This is unfortunate because “bad faith” is a rather vague concept (as is “good faith”).  The vagueness of these standards may give juries too much discretion.

A second issue involves the question of how the qualified privilege would work in practice and who would have the burden of persuasion.  Professor Heidt states that the plaintiff must allege in his complaint that the defendant acted in bad faith when formulating the standard in question.^[26]  Furthermore, the defendant ought to prevail on a summary judgment motion if the plaintiff fails to show that there is a genuine factual dispute over the defendant’s lack of good faith.^[27]  Thus, in order for the cause of action to proceed, the plaintiff would have to make a prima facie showing that the defendant acted in bad faith.  In order to provide greater protection to standards development organizations, I would suggest that the qualified privilege approach be reformulated slightly.  Instead of investing standards development organizations with a privilege that can be lost by bad faith, why not make bad faith an express element of the plaintiff’s claim?  In other words, instead of allowing the plaintiff to base his claim on negligence, perhaps it would be simpler to raise the level of culpability from negligence to bad faith.  Additionally, I would remove “good faith” from the analysis, except to the extent that “good faith” necessarily precludes the sort of mens rea that is necessary for bad faith.  Finally, since the privilege typically depends on a question of fact, the liability issue will normally be determined by lay juries who usually have little understanding of or sympathy for tradeoffs or cost-benefit analysis.^[28]  As defendants’ lawyers know, the best strategy for the defense is to win on a motion for summary judgment—not to convince a skeptical jury that the defendant was not negligent.  Therefore, an exculpatory rule, if it is to be effective, ought to enable the defendant to dismiss the case at an early stage in the proceedings by showing that the plaintiff has failed to prove an essential element of the case.^[29]

An even better approach would be a bright line rule that exempts standards development organizations from liability for personal injuries when these injuries are allegedly caused by the promulgation of inadequate standards.  This alternative could take the form of a statute, judicial decision, or comment to § 43 of the Restatement (Third) of Torts: Liability for Physical and Emotional Harm.  It would declare that: “No standards development organization shall be held liable in a negligence action for personal injuries attributed to the alleged inadequacy of one or more of standards formulated, adopted or promulgated under its authority.”

Unlike the qualified privilege, this exculpatory rule does not depend on the presence or absence of bad faith; rather, it reflects a public policy that the mere promulgation of safety standards ought not to create a duty of care toward consumers of goods and services.  Because the proposed rule does not depend on factual findings, it could be asserted at an early stage of the proceedings, either in connection with a motion to dismiss or a motion for summary judgment.  The proposed rule is only applicable to negligent conduct; it would not apply to allegations of fraud, fraudulent concealment or conspiracy.

To be sure, this proposed rule is strong medicine.  Standards development organizations are greatly protected and injured plaintiffs are deprived access to a potentially deep pocket.  However, I believe that this level of protection is warranted.  As mentioned earlier, tort liability places the financial health of many standards development organizations at risk and threatens to deprive society of the social benefits provided by these nonprofit entities.  Furthermore, the harshness of this proposed rule is mitigated because injured plaintiffs can still recover damages against less remote parties if they can show that their conduct was negligent.

To conclude, the standards formulated by independent standards development organizations—and even by some trade associations—promote social utility.  Tort liability threatens to seriously impair this useful activity and some protection against this is warranted.  Although a qualified privilege, such as that proposed by Professor Heidt, would be helpful, I would prefer a more robust response to the problem.