A company that purchased assets from a manufacturer did not assume liability for the manufacturer’s breach of the implied warranty of merchantability. That warranty confers a promise from product sellers to buyers that their products are, among other things, fit for their ordinary purpose. In Northland Industries, Inc. v. Kouba, a court held that an asset purchaser only assumed the liabilities expressly set forth in its asset purchase agreement, which did not include implied warranties. ABA Litigation Section leaders have differing opinions concerning the effect of this doctrine on asset purchasers and injured plaintiffs.
The Northland case concerned a treadmill manufactured by a company that sold its assets to another company. In the asset purchase agreement, the buyer assumed a list of “specifically identified” liabilities, including claims arising from “written warranties.” After the sale, a woman died while using one of the manufacturer’s treadmills.
The woman’s family sued the manufacturer in Texas state court, alleging negligence, strict liability, and breach of the implied warranty of merchantability. The plaintiffs also sued the company that bought the manufacturer’s assets, alleging that the purchaser was also liable for their breach of warranty claim.
The purchaser moved for summary judgment, arguing the only liability it assumed was for the treadmill’s written warranty, which stated that the manufacturer would “repair or replace” defective parts. It denied assuming the implied warranty, which provides for consequential damages.
The trial court granted summary judgment to the purchaser. It held the asset purchase agreement expressly limited its transfer of liability to written warranties, and so the purchaser did not assume implied warranty claims.
The plaintiffs appealed to the Texas First Court of Appeals. That court recognized that asset purchasers generally do not assume manufacturers’ liabilities. It noted that exceptions to this doctrine exist in some states when there is fraud, when the asset purchase is a merger, or when the purchaser is the continuation of the seller. But the Northland court only considered one possibly relevant exception: asset purchasers assume sellers’ liabilities when they expressly choose to do so.
The appellate court then reversed the trial court’s decision, holding the purchaser actually had assumed the implied warranty when it assumed the written one. It reasoned that the implied warranty merely provided terms that “filled gaps” in the written warranty. It also held that the implied warranty could only be “superseded through the inclusion of an express warranty that addresses the same subject matter as the implied warranty, but with different terms.” And since it found that the manufacturer’s written warranty was not inconsistent with the implied warranty, it held that the implied warranty became part of the written warranty the purchaser assumed.
The Texas Supreme Court reversed the appellate court’s decision, holding that a “written warranty” is, by definition, in writing and implied warranties are not. It concluded that the two types of warranties are therefore distinct from each other, and so when the purchaser agreed to assume written warranties, it did not intend to also assume an implied warranty. As a result, it decided the purchaser could not be liable for an implied warranty claim.
Litigation Section leaders agree that Texas’s highest court was correct to reject the argument that the implied warranty was a “gap filler” that became incorporated into the written warranty. “The notion of it as a gap filler doesn’t really work because it exists whether or not there is an express warranty,” says Tonya G. Newman, Chicago, IL, cochair of the Section’s Products Liability Committee.
The direct impact of the Northland case on other asset purchase agreements is unclear. “This is a contract-specific issue,” says Adam E. Polk, San Francisco, CA, cochair of the Section’s Class Action & Derivative Suits Committee. He says that the court reached the right decision because the specific clause at issue was worded to “provide for the assumption of written warranties, explicitly citing them, and did not identify implied warranties as assumed liabilities.” Still, he says, the decision should “encourage parties to be vigilant in specifying the parameters of their assumption of liabilities provisions.” Newman agrees, saying the decision “is going on my list of things I talk to my partners leading deal teams to think about.”
Some argue that protecting asset purchasers from liability may harm consumers. “Categorically precluding consumers from recovery where there has been a predicate asset transfer deprives them of recourse through no fault of their own, and in that sense is bad for those who have suffered injury,” says Polk. Others see it differently. “There are a number of other ways to make sure consumers are protected,” Newman says. And this rule leaves plaintiffs “no better and no worse off than a consumer harmed by an entity dissolved for any other reason,” according to Paul M. Kessimian, Providence, RI, cochair of the Section’s Commercial & Business Litigation Committee’s e-Discovery Subcommittee.
