On certification to the Superior Court, Appellate Division, whose opinion is reported at 292 N.J. Super. 293 (1996).
The opinion of the court was delivered by: Pollock, J.
The ultimate issue is whether W.W. Lowensten, Inc. (Lowensten), a distributor, which sold and serviced a defective meat slicer that injured plaintiff, David Mettinger, is entitled to maintain an action for indemnification against Globe Food Equipment Company (Globe Food), the alleged successor to the product line of the manufacturer, Globe Slicing Machine Co. (Globe Slicing). The Law Division rejected Lowensten's claim for indemnification, and the Appellate Division reversed, 292 N.J. Super. 293 (1996). We granted Globe Food's petition for certification, 149 N.J. 139 (1997), and affirm the judgment of the Appellate Division.
The underlying action arose out of an accident that occurred on November 22, 1988, at a Quik-Check convenience store in Clifton, New Jersey. On that date, Mettinger, an assistant manager, accidentally cut his right hand on the unguarded blade of a "Globe Model 500" meat slicing machine (meat slicer).
The relevant facts may be summarized as follows. Mettinger instituted a products liability action against Globe Slicing, Lowensten, and several fictitious corporate defendants. He amended his complaint to name New Globe Parent, Inc. (New Globe), Daphne Horizon Co., Inc. (Daphne), and Mozley Manufacturing Co., Inc. (Mozley) as defendants. Mettinger alleged that in 1987, Globe Slicing sold its outstanding stock together with its assets and liabilities to New Globe. New Globe then sold Globe Slicing's meat-slicer assets to Mozley. Thereafter, New Globe changed its name to Daphne, and Globe Slicing merged into Daphne.
All defendants answered Mettinger's complaint. Lowensten asserted crossclaims against the other defendants. Globe Slicing, New Globe, Daphne, and Mozley failed to answer interrogatories. Pursuant to Rule 4:23-5, the Law Division dismissed their answers and entered defaults against them.
In December 1992, Lowensten asserted a third-party complaint against Globe Food. Lowensten claimed that Globe Food was a successor to the producers of the "Globe" meat-slicer product line, namely, Globe Slicing, New Globe, Daphne, and Mozley. Globe Food was incorporated in February 1991, and purchased Mozley's meat-slicer assets in May 1991. The asset-purchase agreement between Mozley and Globe Food required Mozley to indemnify Globe Food for, among other things, any liability arising out of product-liability actions brought against Globe Food or its indemnities related to products that were manufactured or sold before the date of purchase. Globe Food was aware of Mettinger's lawsuit before its purchase of Mozley.
Lowensten provided Globe Food with all discovery obtained in the matter before its appearance. Globe Food also participated in discovery. It answered Lowensten's interrogatories and requests for documents, and appeared at depositions, including that of Globe Food's president, Hilton Garner.
The Law Division granted Globe Food's motion for summary judgment dismissing Lowensten's third-party complaint seeking indemnification. The court found the existence of a genuine issue of material fact on the issue whether Globe Food had continued Globe Slicing's product line. It declined, however, to extend to Lowensten's benefit the product-line exception to successor liability adopted in Ramirez v. Amsted Industries, 86 N.J. 332 (1981). The court held that the product-line exception benefitted plaintiffs only. Because the court found that the statute of limitations had expired on Mettinger's claims against Globe Food, it granted Globe Food's motion for summary judgment dismissing Lowensten's third-party complaint for indemnification.
Mettinger proceeded to trial against Lowensten. The jury returned a verdict in favor of Mettinger in the amount of $350,000.
On Lowensten's appeal, the Appellate Division upheld the judgment for Mettinger, but reversed the grant of summary judgment in favor of Globe Food, holding that Lowensten could maintain an action for indemnification against Globe Food. The Appellate Division reasoned that Mettinger could have pursued an action against Globe Food as a successor to Globe Slicing. 292 N.J. Super. at 315-17. It concluded that because both Globe Food and Lowensten were potentially liable to Mettinger, Mettinger's decision to sue only Lowensten should not predetermine whether Globe Food or Lowensten is ultimately liable. Id. at 317.
The Appellate Division remanded the matter for trial on the issue whether Globe Food sufficiently continued the product line of Globe Slicing to justify the imposition of successor liability on it. Ibid. The court held, however, that Mettinger's judgment on liability and damages against Lowensten bound Globe Food. Id. at 318. Consequently, the court refused to grant Globe Food a new trial on liability and damages if, on remand, Globe Food was found liable to indemnify Lowensten. Id. at 317-18. The Appellate Division relied on N.J.R.E. 803(c)(26), which permits a judgment debtor seeking indemnity to introduce a final judgment entered against it in a prior action as conclusive evidence of the judgment debtor's liability, the facts on which the judgment is based, and the reasonableness of the damages recovered in that action, provided the defendant in the indemnification action had notice and an opportunity to defend the first action. Additionally, the Appellate Division held that Mettinger had timely sued Globe Slicing. Consequently, the statute of limitations pertaining to his personal injury claim, N.J.S.A. 2A:14-2, would not have barred Mettinger's claim against Globe Food. The court concluded that Mettinger's failure to join Globe Food "should not determine whether the burden of paying his damages should ultimately rest on Lowensten or on Globe Food[ ]." 292 N.J. Super. at 317.
Generally, liability for injuries caused by defective products extends from the manufacturer down the chain of distribution to distributors and retailers. Promaulayko v. Johns Manville Sales Corp., 116 N.J. 505, 510-11 (1989). A consumer injured by a defective product may bring a strict liability action against any business entity in the chain of distribution. Id. at 511. The underlying public policy is that those engaged in the producing and marketing enterprise should bear the cost of marketing defective products. Nieves v. Bruno Sherman Corp., 86 N.J. 361, 371 (1981). Absent an agreement to the contrary, however, distributors and retailers are entitled to indemnification from the manufacturer. Promaulayko, supra, 116 N.J. at 511. The rationale is that the liability of distributors and retailers is merely vicarious, but the manufacturer's liability is primary. Ibid.
Traditionally, if the manufacturer sells or transfers its assets to another company, the successor is not liable either to injured parties or to distributors and retailers unless: (1) the purchaser expressly or impliedly agreed to assume such debts or liabilities; (2) the transaction amounts to a consolidation or merger of the seller and purchaser; (3) the purchasing corporation is merely a continuation of the selling corporation; or (4) the transaction is entered into fraudulently to escape the debt or liability. McKee v. Harris-Seybold Co., 109 N.J. Super. 555, 561 (Law Div. 1970), aff'd, 118 N.J. Super. 480 (App. Div. 1972). A fifth exception, sometimes incorporated in one of the preceding exceptions, arises from the absence of adequate consideration for the sale or transfer. Ibid. Thus, under traditional rules, neither plaintiffs nor distributors and retailers may maintain an action against a successor corporation unless they can establish one of the exceptions.
In Ramirez v. Amsted Industries, supra, however, this Court abandoned the traditional approach in the products liability context and adopted the "product-line exception" to successor corporation liability, holding:
[W]here one corporation acquires all or substantially all the manufacturing assets of another corporation, even if exclusively for cash, and undertakes essentially the same manufacturing operation as the selling corporation, the purchasing corporation is strictly liable for injuries caused by defects in units of the same product line, even if previously manufactured and distributed by the selling corporation or its predecessor.
In Nieves v. Bruno Sherman Corp., supra, decided the same day as Ramirez, we extended the product-line exception. We permitted the plaintiff in Nieves to maintain an action against an intermediary successor corporation that acquired the original manufacturer's assets and continued its product line but sold those assets to another corporation before plaintiff's accident occurred. 86 N.J. at 368. By acquiring the business assets of the original manufacturer and continuing to manufacture and sell its product line, the intermediary successor "became 'an integral part of the overall producing and marketing enterprise that should bear the cost of injuries resulting from defective products.'" Id. at 371 (quoting Ray v. Alad Corp., 560 P.2d 3, 11 (1977)).
Only a minority of states have adopted the Ramirez product-line exception. See Restatement (Third) of Torts § 12 cmt. b (1997). Critics of the exception believe that it is unfair, socially wasteful, and may lead to the piecemeal transfer of assets. Ibid. On this appeal, however, neither party challenges the validity of the Ramirez exception, and we continue to believe it strikes a sound accommodation of the competing interests.
In Ramirez, we recognized three reasons for imposing potential liability on a successor corporation that acquires the assets and continues the manufacturing operation of its predecessor:
(1) The virtual destruction of the plaintiff's remedies against the original manufacturer caused by the successor's acquisition of the business, (2) the successor's ability to assume the original manufacturer's risk-spreading role, and (3) the fairness of requiring the successor to assume a responsibility for defective products that was a burden necessarily attached to the original manufacturer's good will being enjoyed by the successor in the continued operation of the business.
[86 N.J. at 349 (quoting Ray, supra, 560 P.2d at 11).]
Subsequent lower court decisions have examined a plaintiff's right to use the product-line exception to hold successor manufacturers liable for injuries caused by their predecessors' products. See, e.g., Bussell v. DeWalt Prods. Corp., 259 N.J. Super. 499 (App. Div. 1992) (permitting, among other things, use of product-line exception against successor corporation that continued to manufacture "essentially" same product), certif. denied, 133 N.J. 431 (1993); Goncalvez v. Wire Technology & Mach. Co., 253 N.J. Super. 327 (Law Div. 1991) (permitting plaintiff injured by defective equipment to maintain action against successor corporation that allegedly purchased manufacturer's assets in liquidation proceeding and continued product line); Wilkerson v. C.O. Porter Mach. Co., 237 N.J. Super. 282 (Law Div. 1989) (permitting injured plaintiff to use product-line exception against successor manufacturer that purchased original manufacturer's assets in bankruptcy sale); Brotherton v. Celotex Corp., 202 N.J. Super. 148 (Law Div. 1985) (holding that Ramirez's product-line exception is applicable to recovery of compensatory damages only, not punitive damages). To date, however, no New Jersey decision has examined whether a defendant distributor or retailer may use the product-line exception to maintain a third-party action for indemnification against a successor manufacturer.
Globe Food argues that the product-line exception is intended to benefit injured plaintiffs only and does not support Lowensten's indemnification claim. To support its argument, Globe Food relies on Hill v. Trailmobile, Inc., 603 A.2d 602 (Pa. Super. Ct. 1992). In Hill, an intermediate Pennsylvania appellate court upheld the trial court's refusal to permit defendant Trailmobile, Inc., which manufactured a trailer containing an allegedly defective power gear, to seek indemnification from alleged successors to the manufacturer of the defective power gear. The court rested its decision on two grounds. First, it stated that "[t]he product-line exception is a remedy which was created to afford relief to plaintiffs, victims of manufacturing defects who, due to the sale or transfer of the manufacturing corporation, otherwise would have no avenue of redress for injuries caused by defective product." Id. at 607. It believed that permitting Trailmobile to obtain indemnification from the successors would "subvert the policy considerations that prompted adoption of the rule." Ibid. Second, the court reasoned that Justice did not require imposition of liability on the successor corporation because Trailmobile could have obtained indemnification from the parent corporation of the power-gear manufacturer, which had contractually assumed its subsidiary's liabilities, had it timely asserted a claim against it. Ibid. Moreover, the court found Trailmobile's "efforts to extend the product-line exception in this case particularly inappropriate[,]" ibid., because the purchase of the power-gear manufacturer's assets did not virtually destroy Trailmobile's remedies and because neither of the purchasers could properly be considered "successors" to the manufacturer. Ibid.
We decline to apply the product-line exception so narrowly. More persuasive is the reasoning of the California Court of Appeal, which explained:
The constant theme of strict tort liability has been "to elevate Justice and equity above the exact contours of a mathematical equation. . . ."
Fundamental fairness has been sought through a balancing of the rights of the injured party against the rights of those engaged in business, including the latter's reasonable commercial expectations. Placing the economic burden of injuries on those best able to pay for those costs while permitting the transfer of that burden to those most culpable is consistent with the equitable considerations inherent in the resolution of the difficult problems which have been judicially posed.
[Rawlings v. D.M. Oliver, Inc., 159 Cal. Rptr. 119, 124 (Ct. App. 1979) (citation omitted).]
Thus, in Rawlings, the court applied the product-line exception to a successor corporation even though its predecessor's product was not mass-produced but was manufactured in accordance with the owner's plans and specifications. Id. at 124-25. See also Kaminski v. Western MacArthur Co., 220 Cal. Rptr. 895, 901-02 (Ct. App. 1985) (permitting product-line exception to be used against successor distributors as well as manufacturers).
Although a primary justification for the product-line exception is to provide compensation for otherwise remediless victims of a defective product, the imposition of successor liability on corporations also serves the public interest "of spreading the risk to society at large for the costs of injuries from defective products." Ramirez, supra, 86 N.J. at 350; see also Ray, supra, 560 P.2d at 8 ("The paramount policy to be promoted by the rule is the protection of otherwise defenseless victims of manufacturing and the spreading throughout society of the cost of compensating them.") (emphasis added). In general, manufacturers are better positioned to avoid and allocate risk than distributors. See Promaulayko, supra, 116 N.J. at 513 (indicating that those higher in chain of distribution are more efficient accident avoiders and better able to bear risk); Suter v. San Angelo Foundry ...