Can corporate officers or directors be held personally liable for defective products?

Twelve years ago, we heard reports about drivers who experienced sudden acceleration of their Toyota vehicles. Five years ago, we heard the surprising news of General Motors vehicles which had an ignition switch defect which could result in the car shutting itself off as it was being driven -- a defect which had been known years before but not revealed or corrected. Five years ago, Volkswagen was under investigation for designing a control which would change the behavior of its diesel engines by turning on the emissions control systems only when that system was going to be tested. A year ago, we heard the terrible news of two Boeing 737 Max plane crashes, causing hundreds of deaths, because of a new flight control system.

In each of these situations, we heard about the actual or suspected knowledge of corporate officers and directors, and speculation about whether these people approved conduct which they knew or should have known was creating an increased risk of injury or death from these products manufactured by the corporation they administer.

Can these officers and directors be held liable for the injuries and wrongful deaths, and resulting damages suffered by the victims of these products? The short answer is yes, but in very limited circumstances.

If you were to look solely to the guidance of the California Supreme Court, written in the majority opinion in Frances T. v. Village Green Owners Assn., 42 Cal. 3d 490 (1986), you might say "of course they can", since that opinion states: "Directors are jointly liable with the corporation and may be joined as defendants if they personally directed or participated in the tortious conduct." But, in reality, Frances T. doesn't provide a clear answer.

This case came to the Rose Bird-led Supreme Court, at a time when negligence-based tort "duty" analysis was expanding to the boundaries of public policy and "societal duty" was an important consideration for the majority of the court.

In Francis T., one of the owners of a unit within a large complex suffered a burglary -- as had many other unit owners. She notified the board of the condominium association that the event had occurred and asked for more security -- specifically, more outdoor lighting. Many months of discussion passed but no action. When Francis T. installed her own outdoor lighting, the management company for the complex asked her to remove the lighting -- or turn it off. Shortly after complying by turning off all outdoor lighting, Francis T. was again burglarized, and this time also sexually assaulted. She sued the association and the directors for damages. The defendants demurred to the three causes of action of the complaint, and the trial court sustained the demurrers. After hearing at the court of appeals, the Supreme Court granted review of the two main issues: What duty did the condominium owners association owe Francis T., and what duty existed which might give rise to tort liability for the directors of the association.

The court had previously stated that the rule imposing liability on an officer or director for participation in or authorization of tortious conduct has its roots in agency law. Directors and officers are agents of the corporate principal, and an agent is liable for her or his own acts, regardless of whether the principal is also liable. Frances T., 42 Cal. 3d at 505; Civil Code Section 2343. Civil Code Section 2343 also provides: "One who assumes to act as an agent is responsible to third persons as a principal for his acts in the course of his agency, in any of the following cases, and in no others: [¶] ... [¶] 3. When his acts are wrongful in their nature." This rule applies to officers and directors. Frances T., 42 Cal. 3d at 505; Mears v. Crocker First Nat. Bank, 84 Cal. App. 2d 637, 642 (1948).

In considering the allegations of the complaint against the individual directors, the Supreme Court held: "Like any other citizen, corporate officers have a societal duty to refrain from acts that are unreasonably risky to third persons even when their shareholders or creditors would agree that such conduct serves the institution's best interests. ... The only duty which an executive officer of a corporation owes to a third person, whether he be an employee of the corporation or a complete stranger, is the same duty to exercise due care not to injure him which any person owes to another. If an injury is sustained by a third party as the result of the independent negligence of the corporate officer, or as the result of a breach of the duty which that officer, as an individual, owes to the third party, then the injured third party may have a cause of action for damages against the officer personally.' [Citation.]" Frances T., 42 Cal. 3d at 506, n.12.

The majority opinion was challenged by a definitively argued dissent by Justice Stanley Mosk. Justice Mosk wrote that he had difficulty determining where the individual directors owed a negligence duty of due care to a third person, and even if there had been a duty, it would not be breached as long as the directors were acting within the good faith required by the business judgment rule. To hold otherwise would impose a higher duty of due care on the directors than the duty they owed to the corporation. Id. at 530 (Mosk, J., concurring and dissenting).

In practice, the trial and appellate courts have applied the rule of director liability for corporate negligence to situations where the director has personally performed the conduct which was found to be negligent --where the act of the corporation is really the act of the individual. For example, in Michaelis v. Benavides, 61 Cal. App. 4th 681 (1998), a corporate concrete contractor poured concrete for a patio and driveway at a home. The job was poorly done. The homeowner sued the president, director, and majority shareholder of the corporation. The grant of nonsuit in favor of the individual was reversed, since the director was the only holder of a contractor's license for the corporation and had personally supervised the work and was agreed to have been personally negligent in his work on the job. The court held that the existence of the corporation did not shield the director from liability for his own negligence. Id. at 686.

Recently, the U.S. district court in Massachusetts, applying California law, held that a CEO's alleged negligent approval of a dialysis company's use of defective and unreasonably dangerous concentrates during dialysis treatment did not support the officer's joinder as an individual defendant since there was no evidence of his "participatory connection" with the product which would have supported his personal liability for either strict products liability or negligence. In re Fresenius Granuflo/Naturalyte Dialysate Products Liability Litigation, 76 F.Supp.3d 321, 338 (2015).

However, a director's liability for his approval of corporate conduct which is inherently wrongful or illegal is much more likely. The approval of such conduct cannot be reasonable or in good faith and therefore cannot be covered by the business judgment rule. Murphy Tugboat Co. v. Shipowners & Merchants Towboat Co., Ltd., 467 F.Supp. 841, 851-57 (N.D. Cal. 1979), aff'd sub nom. Murphy Tugboat Co. v. Crowley, 658 F.2d 1256 (9th Cir. 1981).

In Spahn v. Guild Industries Corp., 94 Cal. App. 3d 143, 157, n.9 (1979), the Court of Appeal held officers and directors of a corporation were personally liable for fraud committed by a managerial employee because they knew about and allowed the tortious conduct to occur. Many other cases have upheld director and officer liability for intentional torts by the corporation, including tax evasion, appropriation of trade secrets, misleading disclosures leading to justifiable reliance for purchase of products or investment decisions, and other intentional tortious conduct.

The authors were unable to find a single California case where an individual director or officer was found to be liable for personal injuries or wrongful death based on his or her approval of a corporate product's defects in manufacturing or design.

The Toyota, Volkswagen, General Motors or Boeing events, however, may present conduct that is inherently wrongful, or for which directors and officers have not acted in good faith in relying on the information that corporate employees are providing them. Especially when thinking of the extent to which officers and directors discussed the evasion of clearly defined consumer safety regulations or regulatory oversight, these corporate decisions are at least arguably inherently wrongful enough to be held to be intentionally creating an increased risk of injury to users of the products.

The Francis T. court set out the required allegations to state a tort cause of action against association directors in their individual capacities: "To maintain a tort claim against a director in his or her personal capacity, a plaintiff must first show that the director specifically authorized, directed or participated in the allegedly tortious conduct [citation]; or that although they specifically knew or reasonably should have known that some hazardous condition or activity under their control could injure plaintiff, they negligently failed to take or order appropriate action to avoid the harm [citations]. The plaintiff must also allege and prove that an ordinarily prudent person, knowing what the director knew at that time, would not have acted similarly under the circumstances." Frances T., 42 Cal. 3d at 508-09.

Certainly these allegations seem to be supported by reported facts and enough information and belief that a complaint of this nature can move beyond the demurrer stage if you were to file a lawsuit which included one or more officer or director of Toyota, Volkswagen, General Motors or Boeing. The known and expected conduct regarding the designs was arguably inherently wrongful and approval of design decisions of products was in bad faith. Accordingly, there just might be a way to establish individual liability to persons injured by these products. 