Wholesalers and product liability: six activities that can increase risk

Attaching your brand to a product you didn’t make can help boost your position in the marketplace, but it comes with additional risk. Offering significant input into the product design and testing of a white-labeled product can shift more of the manufacturer’s risk to your wholesale business. To avoid this, work with a manufacturer that already produces the desired product and has a strong track record of successfully branding and packaging products according to accepted best practices and consensus standards—and make no additional changes of your own design. As private labeling can establish your wholesale operation as responsible for the product, do your due diligence and verify that your manufacturer has formal procedures for meeting relevant standards and testing product safety.Work with a manufacturer that currently produces the desired product and has a strong track record of branding and packaging products according to accepted best practices and consensus standards—and make no additional changes of your own design.

Many wholesalers buy products directly from foreign manufacturers to reduce costs. While this strategy can offer big cost savings, it can also bring added risks. For example, products made overseas often do not follow U.S. safety and consensus standards. If a product does cause injury or damage, the wholesaler could be held liable, even if the foreign manufacturer is negligent. If your wholesale operation direct imports, be strategic when pre-selecting your suppliers:

• Check to see if they have been named in any prior lawsuits and confirm they follow relevant U.S. standards.
• Have a formal process to judge the safety and reliability of your suppliers, and the extent of uncontrolled liability risk they may impose on your company.
• Establish a formal product recall procedures so you can quickly identify and remove affected inventory from the supply chain.

  Having contracts in place to clarify responsibilities and service expectations can also help.  However, unless a foreign manufacturer has a legal presence in the U.S. or has agreed to be subject to the jurisdiction of U.S. courts, there may be little opportunity to recover damages. As a result, your business could be held solely liable.

How a company portrays, displays, or prepares a product for buyers can increase risk. As a wholesaler, you aren’t necessarily a product expert. For this reason, avoid offering demonstrations or making any changes to manufacturers’ instructions. Remember that all instructions, literature, warnings, and repair/replacement/maintenance documentation provided to you by the manufacturer must be passed on to the buyer. Also, employees offering verbal instructions should be well-versed in the use of the product—and be careful not to omit potential hazards or understate limitations of the product. This is especially important for technical products that require specialized knowledge of the manufacturer and the ultimate user.

Some wholesalers provide post-sale services, such as installation or assembly, to differentiate from competitors. These types of services are customarily only offered by licensed dealers or those specifically authorized and trained by the original equipment manufacturer. However, performing these services can increase your business’s liability. Before moving forward, make sure you’re technically proficient in the necessary tasks, employ the proper tools, and adhere precisely to manufacturers’ guidelines. Wholesalers without the capability to safely carry out these types of services should hire expert contractors—with applicable education and licensure—and use contracts that establish roles and assign liability appropriately .If you don’t have the ability to safely carry out product assembly or other services outlined in your OEM contract, hire expert contractors with appropriate licenses, certifications, and qualifications.

Wholesalers that resell liquidated or overstocked inventory can be liable for damages caused by that inventory. If you’re considering this for your company, it’s important to understand the risk you may be assuming. The continued sale of banned three-wheel all-terrain vehicles (ATVs), for example, resulted in heavy damages for some dealers. In the case of ATVs, some sellers even faced civil and criminal action. Though banned products provide an extreme example of reselling risks, the overall point remains valid: stay informed of potential risks associated with your inventory.

In some cases, your wholesale business may conduct “pass-through” sales, never seeing or touching the merchandise. However, any time you take ownership of a product before it reaches a buyer’s hands, such as via storage or handling, you are taking on some liability risk that you should manage:

• Whether your warehouse stores inventory for three days or three weeks, factors such as temperature, water, or contact with equipment or other inventory can compromise products.
• This includes breaking up a larger pallet to create smaller orders, opening boxed goods to mix and match with other products (such as creating a camping kit or medical kit), re-labeling shipments, or removing literature, product components, or accessories (such as screws or repair patches) that accompany the original packed product.