One legal risk in buying a manufacturing business is product liability. Purchasing the assets as opposed to the equity of the manufacturer reduces that risk. However, in all states the buyer may be responsible for any product liability claims that it expressly assumes in the asset purchase agreement.
Here, the buyer purchased the assets of a company that made treadmills. In the APA the buyer assumed only the seller’s repair or replace warranty and expressly stated that the buyer was not assuming any other seller product liability.
Before the closing the seller sold a treadmill to a gym that a woman later visited. One day while using the treadmill, she fell, striking her head. She later died due to her injuries from the fall.
The family sued the buyer in a Texas state court, claiming that the buyer had assumed Wisconsin’s UCC version of the implied warranty of merchantability. The buyer claimed it did not.
The trial court agreed with the buyer and the family appealed to a Texas intermediate appellate court. The appellate court reversed finding that the seller warranty did not expressly exclude the implied warranty of merchantability within the meaning of the UCC.
This case is referred to as Kouba v. Northland Industries, Inc., No. 01-18-00252-CV, Court of Appeals of Texas, First District, Houston (Opinion issued August 13, 2019)
The buyer had a good argument that it did not assume the seller’s implied warranty of merchantability. It seemed clear that the seller had an implied warranty of merchantability; but it was also clear under the APA that the buyer was only assuming seller’s repair or replace warranty. In fact, the chief justice of this Court of Appeals of Texas, First District, Houston filed a strong dissent, which agreed with the buyer’s position.
The takeaway: a buyer of the assets of a manufacturer should expressly disclaim any assumption of any seller implied warranty of merchantability in its APA.
By John McCauley: I help companies and their lawyers minimize legal risk associated with small U.S. business mergers and acquisitions (transaction value less than $50 million).
Telephone: 714 273-6291
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