On demand 1h 13s Intermediate

Marketing Practices Liability in the Firearms Industry

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Marketing Practices Liability in the Firearms Industry

In this course, Camden Webb, who is a partner at Williams Mullen, will discuss theories of potential liability for the means by which firearms industry members market their products and will provide useful strategies for reducing liability risks. The course will provide an overview of the statutes and case law that regulate this issue, including the Protection of Lawful Commerce in Arms Act, case law interpreting the statute, developments regarding the theories of potential liability for marketing of firearms, and new state statutes that could increase risk to firearms industry members. Attendees will learn about the applicable law and the theories of liability, the best practices for monitoring and policing marketing strategies, and the steps that can be taken to reduce the risk of potential liabilities.

Transcript

- Hello, my name is Camden Webb, and I'm a partner with the law firm of Williams Mullen. Much of what I do at the firm is head our Firearms Industry Practice Group. And part of what we do is address the topic we will address today, which is Potential Marketing Practices Liability, for Firearms, Industry Members. It's a very interesting subject. It's a fairly new avenue of potential liability, and there's a lot of novelty and complexity in this area. So let's get started. First, what I hope we will accomplish today is you will be able to understand the theories of potential liability for the marketing of firearms. You'd be able to identify some best practices for monitoring and policing marketing strategies for an industry member. And you would know the specific steps that can be taken to reduce the risk of potential liability. We'll cover several areas today. First, we're going to talk about the Protection of Lawful Commerce and Arms Act. Which is a statute that protects industry members from liability for a third party's misuse or criminal use of a firearm. We're then gonna talk about some case law, the "Soto" case from Connecticut, which was really the first case of this theory of liability. There's a slide fire case and other cases that we'll speak of. We're gonna talk about a rapidly developing area, which is crucially important, and those are state state statutes that are intended to avoid the effect of the PLCAA. And then finally, what will be very interesting for practitioners is, we'll discuss how do you gauge the risk and evaluate best practices to reduce risk considering how novel this theory of liability is? Let's get started with the PLCAA, which is an abbreviation of the Protection of Lawful Commerce and Arms Act. Some people also call this "PL-a-CAA." A note about the background in the intent of the PLCAA. This statute was passed in 2005, it was intended, and the express intent of Congress is reflected to stop the nuisance and politically or policy motivated lawsuits. Back before 2005, you had a number of cities that sued firearms industry members, under nuisance theories or similar theories of liability. And Congress passed the PLCAA with the express purpose of putting a stop to these types of lawsuits. The statute is fairly straightforward, and then of course it can get complex from there. But in essence, the statute bars, legal actions, against firearms, manufacturers, sellers, and others for criminal misuse of firearms. Now it is an absolute bar to such lawsuits with certain limited exceptions and the exceptions become crucially important to understand. As a side note, I've been using the term firearms as you'll learn here in the presentation, this applies to ammunition, and certain components of firearms. So if I use the shorthand word firearms, note that it means more than just a true firearm, it means other products as well. So the firearm is of the protection of Lawful Commerce and Arms Act. Is codified under Title 15 of the United States code, 7 9 0 1 and following. The definition section is crucially important, because this is a definition based statute. And it's important to understand the definitions because, that is what the entire rule or law turns on, is whether you have met a definition as reflected in section 7902. The first and most important definition is a "qualified civil liability action." And that is because a qualified civil liability action is absolutely barred. Congress was serious enough about this area of the law, that in fact, in 2005, upon enactment of the PLCAA, pending lawsuits were foreclosed. So it's really important to understand what a qualified civil liability action is defined as. In short form, it's any civil action or administrative proceeding, by any person, against a seller or manufacturer of firearms or ammunition for any relief whatsoever when the harm results from criminal or unlawful misuse of a product. And at each one of those criteria, there are important definitions. Before we get to that, this is really just a, a codification of the traditional common law rule. A common law, if a third party were to criminally use a product, then usually, unless there are some certain exceptions at common law, such as negligent entrustment, there would be no liability to the person who, for example, sold that product. Now, moving on to, some definitions, and I will just note this so that's important for you to understand. Within this definition of qualified civil liability action, you've got terms of seller, manufacturer, firearms, ammunition. Those are all defined terms. And in order to understand the statute, again, this being a definition driven statute, it is important to go to section 7902 and read the definitions and understand them. Now we have the qualified civil liability action, which is anything that fits that definition is barred, but it is possible for an exception to apply. And there are several very important exceptions within the, within the statute. First and foremost, this statute in no way affects a traditional products liability action. If you have a strict product liability action, if you have a negligence action for negligent designer manufacturer, if you have a breach of warranty action, brought by a consumer, those simply are not affected whatsoever by the PLCAA. So for example, if someone were to be injured because the safety on a firearm malfunctioned, and it is attributed to the manufacturer, well, then the manufacturer would still have liability there. Likewise, on the seller level, think about a retailer, a gun shop. If someone were to sell a firearm to someone, to clearly, under the state law would not be one that you would entrust a firearm to, there could be liability there. So you've got these exceptions that really illustrate that what this statute is truly designed to do, is to stop lawsuits that are based upon criminal misuse of a firearm, or unlawful use of a firearm. Now, we need to talk about a key, key exception, and that really is what drives this entire body of law that I call, "marketing practices liability." There is an exception that says, "that if a manufacturer or seller knowingly violates a state or federal statute applicable to the sale and marketing of firearms, and that violation is approximately causes a person injury, then there will not be protection under the PLCAA." Now there is a lot packed into that exception that bears discussion. First manufacturer and seller are defined terms, need to go back to the section 7902 and make sure that one of those two types of persons definitions are met. Next, it's got to be a knowing violation. That's an interesting area that's developing really, almost day by day in this area, knowing violation. And then it must be a state or federal statute. There could be no common law based claim to which this exception would apply. And then that statute has to be applicable to the sale and marketing of firearms. That's a very interesting and very hotly litigated issue we'll talk about. And then you have to have proximate cause between the violation, the knowing violation of the statute and the injury. Again, there are suits underway that test that, and help try to help us figure out what exactly that means. So let's talk about the phrase, "applicable to the sale or marketing of firearms." Here we have to ask, "does that mean a statute specific to firearms or a general generally applicable statute?" For example, the gun control act would, makes it illegal facilitating a straw purchase and a retailer who knowingly makes a sale to someone who is buying the gun for someone else, they have violated the gun control act. As a sidebar, the straw purchase is simply when someone walks to a gun store and purchases a gun, and they're not really buying it for themselves or buying it for someone else. You see that a lot, when a friend of someone who has a felony goes into a gun store, but if the seller makes that sale, they violated the gun control act. They have violated a statute that is specifically applicable to the sale and marketing of firearms. However, does this perhaps mean, the applicable to the sale or marketing of firearms, does it potentially mean that it is a generally applicable statute that could regulate firearms, but also regulates all kinds of other products? For example, which we'll talk about in detail is this estate's Unfair and Deceptive Trade Practices Act. Now that brings us to the Soto v. Bushmaster case. The setting of this case was a motion to dismiss, and the issue of the motion to dismiss went to the Connecticut Supreme Court. So of course, as we know, with the motion to dismiss, the court would take, would take the allegations of the pleading as true and evaluate the legal sufficiency of the complainant. This was an interesting decision because it was the first decision that recognized this path of liability that I call marketing practices liability. It, it said that an exception to the PLCAA applied because, of a claim under the Connecticut Unfair and Deceptive Trade Practices Act. I believe Connecticut calls it, the Unfair Trade Practices Act. That generally applicable statute, there was an allegation that the manufacturer violated the statute and the Connecticut Supreme court said, "Yes, the exception, for knowingly violating a statute applicable to the sale or marketing firearms, met the Unfair Trade Practices Act." The case is also interesting because it was a sharply split four to three decision by the Connecticut Supreme Court. I think that really illustrates the debate and dispute under the law that is existed in 2019, and then still got ongoing. Let's talk a little bit about the case itself. This arose out of the Sandy Hook shooting, which you probably have heard about. And the plaintiffs filed the suit and alleged that, the defendants, including the manufacturers, marketed AR-15s in an unethical, oppressive, immoral, and unscrupulous manner, that promoted the illegal use of the firearm. They also alleged, that the defendants extolled the militaristic qualities of the AR-15s with the expectation and intent that the firearm be transferred to unsafe users. So those are the allegations of the complaint, and the Connecticut Supreme Court applying the proper standard, took those as true. Now, part of what is very instructive about Soto, I believe is reading exactly what the Supreme Court said verbatim. What formed the basis of the Unfair Trade Practices Act of the marketing of this firearm. And you can read the case, and it's a rather lengthy paragraph. And I certainly won't read it to you. But the Supreme Court looked at eight different factors, and they really, they, the factors bore upon the quality of the firearm. For example, some of the marketing materials promoted the rifle as, "The uncompromising choice, when you demand a rifle as mission adaptable as you are." And the other factors really kind of bore on the, some militaristic qualities of the firearm in the sense that, this type of firearm, although not the same firearm, this type of firearm, has been used by the United States Military, including the Special Operations Units of the Seals, the Green Berets Rangers and whatnot. Importantly, just as a technical matter, the AR-15 is, that is a semiautomatic rifle, not the, the fully automatic rifles that the United States Military uses. This can be read at one of two ways. And this, I think illustrates the debate here. You could read this as the Connecticut Supreme Court did, which is, it's promoting the militaristic qualities, which means that someone is going to buy this so that they can use it in an unlawful manner. You could also read it as well, there's no better proving ground for this type of firearm than used by the United States Military. And although technically the U.S. Military uses fully automatic, the design in many of the parts, except for a couple of very important parts of the AR-15 are the same as for example, the M4 Carbine or the M16. So you could read it one of two ways. And I think that sh helps illustrate the sharpness of the debate here, is which way this would break. The key holding of Soto, is that the plaintiff sufficiently alleged a Connecticut Unfair Trade Practices Act claim, based upon the alleged wrongful marketing of a firearm. And the allegations met the exception of the PLCAA, that's the key holding. Okay? Now, of course, as we know in litigation, there's the rest of the story. The real impact of this, was that it got by a motion to dismiss, it proceeded to discovery. The defendants petition, the U.S. Supreme Court to review this decision by the Connecticut Supreme Court. was denied on that. And then really the end of the story is, Remington, which is the parent company of Bushmaster, entered bankruptcy while the case was pending the bankruptcy trustee and the insurance carrier that ended up with a settlement of this case. So we really didn't kind of get to the very end after seeing the evidence. And so, unfortunately, this case is not as instructive. We just have a decision based upon allegations of a complaint, not based upon a full evidentiary record. The next case I want to talk to you about is Prescott v. Slide Fire Solutions. And this is interesting because it is again, the case in which the court applied a generally applicable statute. And this was in the U.S. District Court, the district of Nevada. Shortly after Soto, it came out about six months after Soto. This was a case arising out of the Mandalay bay shooting. In that shooting, the perpetrator used what is called a bump stock. And that is a, it is a stock, the butt end of the rifle, that you can replace the traditional stock with a bump stock. And what that does, it allows through application of some energy by the shooter to essentially increase the rate of fire of a semiautomatic rifle. So families sued Slide Fire solutions, and they asserted a claim, under Nevada's Deceptive Trade Practices Act, and they alleged that Slide Fire made knowingly false representations. Now, this is interesting, because the false representations that were alleged were a statement that the bump stock was ATF approved, and a statement that a purchaser could lawfully acquire a bump stock without a background check. Now, as to the latter, can you buy- could at that time, can you get a bump stock without a background check? Absolutely. That's actually a true statement. There was no restriction on buying a bump stock. It was a component of a rifle, not a rifle itself. You could buy it over the counter, no background check. Now was this bump, stock ATF approved? Well, that was not quite as clear, but back, I believe it was 2014. The ATF issued a ruling on the bump stock and said it is not a machine gun. Did the ATF specifically approved slide fire stock? Well, no. So that one was a little more, not as clear that it's a true or false statement. The court denied a motion to dismiss in this case, based upon these false statements. I will talk a little bit about these statements when we do a wrap up of the case law, but just kind of put a place holder on that, that those types of statements were enough for at least one court to say, "there was a violation of Nevada Deceptive Trade Practices Act." The next case I wanna talk to you about, is Timperio v. Bronx Lebanon hospital. This is important because it really illustrates and highlights the rule about negligent entrustment. This is another exception to the statute, and it's important to understand, because that is a very, very popular route or theory of liability for these types of cases. Now, in this case, a retailer was sued because it sold a rifle to a former hospital employee who later used a rifle in a shooting. The gun shop, moved to dismiss citing the PLCAA, but the plaintiff argued that, it was negligent and entrustment and negligent per se, the ladder being another exception under the statute. And as an aside, the exceptions that I've been talking about, you'll find in section 7903 of the PLCAA. Now the gist of the argument here, was that is always negligent to sell an assault rifle because of the rise in mass shootings. Now, any of you who have litigated the negligent entrustment theories under the law will know that usually the focus is on the person to whom the device is entrusted, not the device itself. Now here, this is a Federal District Court, So the district of New York, really just squarely rejected the argument, very clear opinion. And the reasoning was allegations regarding criminal's particular propensities, and gun shop's knowledge of these propensities are what is required. So it's, again, the focus on the person to whom the device is entrusted. Now, this is an interesting area because negligent enstrustment a creature of state law, and it varies by jurisdiction. So if you are participating in a lawsuit that alleges negligent enstrustment, you are very much going to be relying on common law of the state, the jurisdiction in which the suits pending or the law applies. Again, the traditional focus of negligent entrustment is on the person to whom something is entrusted. And of course the person entrusting it, their acts was negligent. I take an example from my home state, North Carolina, and our pattern jury instruction, for example, speaks of the, of an incompetent, habitually careless, or reckless driver, who is likely to cause injury to others. And the case law also suggests that an entrusters actual or constructed knowledge of these conditions of the driver are required. Now, this is interesting. Why does North Carolina say a driver? Well, the negligent enstrustment doctrine really only applies to vehicles. In some states are very reticent to extend the law to other areas. There's a case from Missouri that came out a few years back, that illustrates that, that it's, it's not a common thing for a court to extend negligent entrustment beyond the types of devices, i.e. an automobile, that have been traditionally recognized. But the point is, that if you are litigating a negligent entrustment case, we need to focus on the person to whom the device is entrusted and their propensities. And that is what makes a, that is what would make a successful suit if you were the plaintiff, is being able to show, that there are some propensities of this person and the seller knew it. As a general matter though, negligent entrustment is gonna be a tough row to hoe for a plaintiff. It's not the easiest type of case to prove, but an interesting point under the PLCAA is, go to section 7903, examine the text very carefully, and the exception applies to an action, brought against a seller for negligent entrustment. Okay? Now, one important implication here this exception does not apply to manufacturers. It can't because of the statute, but also if you think about it, how's a manufacturer who never has met the buyer going to negligent entrust something? With the PLCAA exception, just because, the defendant contends that the negligent entrustment doesn't make it, the federal statute doesn't answer your question at all. What you have to do, is analyze whether the complaint alleges, sufficiently alleges negligent entrustment, under state law. So you're gonna have your traditional 12 v. 6 motion to say, "this negligent entrustment claim is not legally sufficient based upon the plaintiff's allegations." All right. Let's then talk about Parson v. Colt's Manufacturing Company, that's Nevada Supreme Court, December, 2022. So very recent, I'm sorry, that's December, 2021. This case was again, arising out of the Mandalay Bay shooting. It was against the rifle manufacturers, not the bumps stock manufacturers. And I put this case out here because this is an illustration of how there's just more than one way to address a claim in the face of the PLCAA. Now in this court, in this case, pardon me, is against, I say, it's against the manufacturers, it was against retailers as well, who sold the rifles to the shooter, the federal district court, where the case was pending, it granted in part and denied in part a motion to dismiss, and it was based on the PLCAA. But the court also still held open issues, pending certification of a question to the Nevada Supreme court regarding a state law claim. The Nevada Supreme Court in a 7-0, decision held that Nevada state statute barred the suit. And why is this important? Well, the PLCAA certainly doesn't answer everything in these types of lawsuits. As we saw with the case regarding entrustment, you need to look at the state common law. In Nevada, in this particular case, with, in the Parsons case, you had to look at the state statute, that might bar the suit. So there's a lot of different things to look at. Although I do think the most important driver of a lawsuit or the lawsuits result in these cases will be the PLCAA. Well, let's talk about some of the, what can we synthesize from these cases as issues to address? Again, this is brand new stuff. This, so the Soto case is three and a half years old, not even that. So there's a lot of litigation and a lot of issues that will need to be sussed out. So the first and most important one is whether other courts will follow the reasoning of Soto and Slide Fire. Those are the cases where the Unfair Trade Practices Act of those states was held to be a quote, unquote, statute, regulating the sale and marketing of firearms. Again, that goes back to the general versus specific debate. Why is that important? Well, all 50 states have Unfair Trade Practices Statutes. These were statutes that are called little FTC acts, because in the late sixties and into the seventies, the states all enacted and equivalent of the federal of the FTC act, which outlawed unfair and deceptive trade practices. So depending on how the, the statutes are written in the various states, and depending on the case law that has developed over 50 years, you're probably gonna find that there's enough commonality to where the theory would be available pretty much in any jurisdiction. All these statutes are phrased very much the same with a little bit of different nuances here and there, but as a general matter, it's the same legal theory. And again, the debate is whether this generally applicable statute will meet the exception. Let's next talk about causation. Recall that in order for the exception to apply for violating a statute, a violation must approximately cause the plaintiff's injuries. In the case in Connecticut, if you go back and you look at the facts of that case, you must question whether there is any evidence or could it ever be proven that the marketing materials are related to the crimes? The basic facts are, the shooter first killed his mother and then took her guns and then went on the rampage. So I think it would be difficult for a plaintiff to make out a approximate causation argument based upon those facts. Again, the Soto case never got far enough to really test that. Let's talk about the Slide Fire case in Nevada. Could the statements that a bump stock is quote, unquote, ATF approved, and that a person could purchase one without a background check, have affected the perpetrator's choice to use the product in the crime? Again, we don't have any evidence. There's not a full record that would shed any light on it. But I do think what's important is to make sure you're focused on this issue. And I also think that, if for example, you're in federal court, and the Twombly plausibility standard applies, this might be a very fertile ground for a defendant to examine and perhaps moved to the forefront of a argument, on for example, a motion due dismiss. Because if you think about it, let's take a complete hypothetical. If for some reason, during the investigation of the perpetrator, there were, you know, the browser history showed a clear, clearly that the shooter had looked at a particular manufacturer's website and had really studied it and all that. Perhaps you could have that as an allegation and complaint, which might, might meet the standard, but these cases that I've seen don't have those types of allegations. 'Cause I don't think there was any evidence that there was any selection of a particular brand based upon marketing materials. So the, the causation is something to really focus on and really take a look at if you have one of these cases. Next there's, there's a little bit of a nuance here and that is a definition of a manufacturer and a seller. Because again, a definition driven statute. The definition of a manufacturer and a seller turn on the definition of a qualified product. In other words, you have to manufacturer or sell a qualified product. Well, what is a qualified product? Well that means a firearm, ammunition or a component part of a firearm or ammunition. Okay? So this is interesting because on the regulatory side of the house with firearms, you've got a difference between components and accessories. Components, for example, somehow improve the function of a firearm and accessory does not necessarily. So the thing, the easiest way to think about that is the bump stock. Is that a component? Absolutely. But a rifle sling, just the strap that you could carry it with, that's an accessory. You get into interesting areas. For example, there are frankly some gun sites that are done defined as a component on the regulatory side of the house and some that are accessories. So it's interesting in the regulatory area. I do think that if you have a case that a component manufacturer sued, it would be an interesting legal in inquiry. And there's really almost no case law on this. There is a New Mexico case from 2014, Sambrano V Savage Arms. And that said that a gun lock is not a qualified product under the PLCAA. So the interesting thing is this can also turn back on a manufacturer or seller, 'cause in order to be defined as a manufacturer or seller and to benefit from the liability protection, you have to sell a qualified product. If it's not a firearm, if it's not ammunition, and if it's not a component, then the PLCAA, exception or a liability shield, would not apply because you're not a manufacturer or a seller. Okay? But at the end of the day, it would be extremely difficult to show, for example, an accessory to a firearm somehow contributed to or caused injury. Finally, we have to look at the term knowingly, because there is some very interesting trends in the cases as to what knowingly means. Really what the courts are doing is saying, "if you intended the act, then you acted knowingly," okay? Stating that a bump stock did not require a background check. For example, you act knowingly. All right? This really, think about it in terms of, go back to just per, completely by analogy, something that helps me remember it is, "specific versus general intent." A general intent crime, for example, is you just meant to do what you did, not that you meant to break the law. Specific intent requires some specific intent to break the law. Courts tend to be, what I'm seeing is, the knowingly simply means it's not totally negligent, et cetera. That's gonna be interesting when we talk about the state statutes, because knowingly just means you meant to do the act rather than some sort of negligence. So let's talk about state legislation intended to avoid the PLCAA. This is a crucially important area because this is brand new and the state statutes are a bear, really. The first one was New York. The New York statute prohibits knowing a reckless creation of dangers to the public. And it also requires industry members to establish reasonable procedures, to prevent unlawful possession used marketing or sales. This law is very interesting. It basically what you have is a statute that says, "if you create a danger and you don't have procedures in place to prevent it, then you, you have violated the statute." And importantly, the New York Attorney General can bring an action, private citizens can bring an action. So this creates a very interesting, really a conundrum, because you are required to establish reasonable procedures to prevent unlawful use possession, marketing sales. So for example, the clearest thing would be, you have to have a procedure in New York, you can't sell a 30 round magazine, because the law of the upper limit for magazine capacity is 10 rounds. But how does reasonable procedures, and adoption of reasonable procedures interface with the requirement to knowingly violate a state statute? Think about this, if you are a manufacturer and you are making products that are sold in New York, how far do you need to go to establish these reasonable procedures so that you don't knowingly violate the statute? On the one hand, if you know about the law, do absolutely nothing, I suppose that may well be knowing violation. But beyond that, how far do you go to get to the reasonable procedures? And if a plaintiff files a suit saying your procedures are unreasonable, doesn't that become an issue of whether there's a reasonable person would have adopted these or not? And if you adopted standards that a plaintiff is after the fact trying to say are not reasonable, these procedures are not reasonable, how can that show a knowing violation of the statute? So these are all very interesting things. This law just went into effect last summer. There has been a challenge to the law, largely based on preemption. It was rejected by a federal district court. I believe Northern District or Western District, one or the other in New York. The case is now on appeal to the second circuit. My understanding is the appellant brief is due on September 1st, 2022. So this, that ruling should probably come out sometime in early '23, if I had to, if I had to take a guess. All right, so let's now talk about California. This law was just enacted in summer of '22. It does not go into effect until summer of '23. This is very clearly, they are going after the public nuisance angle and the law declares that a member of the firearms industry show created a public nuisance, if they're failure to follow federal state or local law cause injury or death, or if the gun industry member engaged in unfair business practices. So it's layering several legal concepts on top of each over. The California statute, like the New York statute, requires reasonable procedures to be adopted. They do have a little bit more of a definition of what reasonable procedures are under the California statute, but not a whole lot. An an industry member will still be faced with the issue of, "Well, how do I, how do I adopt these procedures? What's going to be reasonable?" And it's, it's a challenge. It's going to be a big challenge to address these. Finally, we add New Jersey to the list because in July '22, they passed a statute that is very, very similar to California statute that's in effect immediately. So that is, that is immediate effect, effective upon enactment. And that again contains the same type of regime for sales and marketing compliance. You've gotta have reasonable controls, reasonable procedures in place. This is all very interesting. There's a suit challenging the California statute pending. I would imagine there will be one challenging the New Jersey statute, if it hasn't already been filed, and this is all gonna have to be sorted out, you've got all kinds of interesting issues. The PLCAA, preemption. California also passed a statute regarding marketing to minors. There is a current first amendment challenge to that because essentially it would say you couldn't speak to a minor about anything regarding a firearm, even gun safety, at least that's what the plaintiffs and the case challenging the law allege. So this, this will be very interesting to see how these state statutes pan out in court. In the meantime for industry members, it is a very significant compliance task ahead. And for example, you would, an industry member would need to study its practices for marketing, determine whether it has controls in place to make sure marketing doesn't, you know, go too far. Maybe not the best term, take a turn that would trend towards promoting misuse of a firearm. Manufacturers and other sellers will have to know the laws of each state in which they're selling. Because for example, California, New York or New Jersey have a lot of similar gun laws, but a lot of different ones as well. So someone who is selling products into each of those states would have to know the state laws and what's prohibited because if you don't have controls in place to prevent the sale of a product that is illegal in one of those states, you could have liability. So it's gonna be a lot to suss out. I think also another area that will be interesting is when you have a manufacturer who has a website that it's accessible to someone, for example, in New York, but they don't make any sales into New York. Do you have, if, if one of their firearms makes its way to New York through other channels, do you have liability? Can you have liability simply for having social media or internet presence, which someone can reach out and get to, but you do not direct that towards the state? So we have all kinds of issues that are gonna have to be sorted out over these statutes. Okay. I next want to talk for a few minutes about really what I think for practitioners is probably the most important thing to consider, and that is how to gauge the risk and evaluate best practices to reduce the risk. The fact is, if you represent an industry members, having a case based upon the, the PLCAA exception theory, one of the state statutes, although that chance is increasing, it is still much lower of a chance of having one of those lawsuits, than having a client that needs advice regarding how to guard off, guard against the risk. So this really for practitioners is one of the, probably the most important part of the presentation. Now this type of risk, in my view, is very difficult to counsel clients on, and to make sure that the client is investing in reducing risk. And why is that? Well, I oftentimes, when I'm talking about legal risk, I like to do the X, Y, axis of one, the X axis would be the likelihood that a risk is realized. And the Y axis is the severity of the risk. I might have my Xs and Ys mixed up. I hope not. But you see the point, which is, you've gotta think, "Gosh, how probable is it that this risk is gonna gonna be realized?" That this thing might happen? And then how bad is it gonna be if it does? And some examples that I took from the regulatory space, which I do a lot of regulatory work, and that's why I wanted to use this example. First I have a low likelihood, low severity, regulatory risk. And that for example, is missing the 30 day deadline for updating responsible persons. The ATF requires for every licensee, when people are in a position to control the policies and procedures of the firearms business, they have to be a quote, unquote, responsible person, which in is an application and background check. If you miss it by 30 days, kinda low probability that that's gonna come to the surface. And the result usually with the ATF is look, "Get this person qualified as responsible person," not a whole lot of fallout. Now on the other end of the spectrum, what if a manufacturer fails to serialize firearms in accordance with the ATF regulations? Now relatively it's good probability, that's gonna be recognized as a problem through ATF inspections and even having the products on the market. If you don't have your markings, serialization and markings, correct, it's probably gonna get noticed. And that's a very serious thing for the ATF and really one man's opinion. The ATFs core mission really is supporting law enforcement by being able to trace firearms one of their core missions. Because for example, if you have a shooting, the ATF should be able to look at the firearm and trace it back through commerce from the retailer, if there's a wholesaler, the wholesaler all the way to the manufacturer, and that helps solve crimes. So they're very serious about this and they want it done right. And so that is a high likelihood that the risk is realized and a pretty severe result if you don't get it right, cause the ATF will take action to make sure you do. And kind of in the middle, I took a third example is a products liability suit, negligent design, manufacturing, strict products liability. That's about in the middle, because it could happen, and also mostly your insured on this. So the severity of the risk to the company is, kind of moderate in the middle trending to severe. The problem, and why do I say all this on this matrix or this X Y axis? The problem when talking to clients about this is a lawsuit alleging unlawful marketing practices or something like that, it actually still is a pretty low likelihood that's gonna happen. I mean, these suits are out there and they get a lot of attention, but they really, manufacturers aren't hit with them every single day. But the severity is huge. Yes, you will have insurance to cover it. But the allegations of damages are oftentimes huge. A lot of reputational potential damage, all that. So you've got something that's really bad if it happens, but not hugely likely that it's going to happen. So talking to clients about controlling for this risk is, can be a challenge. What we do is, we help clients, and practitioners should help their clients, analyze marketing practices. And I have found the key question for a client is,, not, are you, do you wanna do this or that? The key question is what is the client's risk profile? How risk averse is the client? That's a key conversation to have, because let's face it, what we have here is rapidly developing law, that's brand new, and when I am asked by a client, "What is the line?" quote, unquote, "that we can't cross it?" It's almost impossible to diagnose that. And so the better conversation I think is, "Client, what's your risk profile?" You have this marketing campaign, which could by some people be read as a violation, maybe not likely, but how important is that campaign to you? And here are the consequences of if you have a lawsuit, et cetera, that that is the best conversation to have starting out when you're analyzing the marketing practices. Now what we then do, and what practitioners should do, is review all the client's marketing materials. This can be done by sampling for example, or something. So you're not spending, you know, a week looking at social media and websites, but you take a good broad view, inclusive view of the client's marketing materials and you identify potential liability. And then you have the conversation of, can you curtail this? Do you need to revise it? Do you want to delay it? How do you remedy anything that's potentially problematic? Again, you can see how important the client's risk profile comes in because maybe this is a campaign that is sort of, you know, somebody could read it as, as being violent of a statute, but it is hugely important to us. Or you may have a client that says, "Well, yeah, that social media campaign is just not that important to us, and we were thinking about scratching it anyway. So let's take it off the table." And then I think you need to also talk to the client, whether certain types of marketing channels are inherently problematic. You have your regular social media, you have the client's website, but are the marketing channels, for example, more predominantly used by people underage? That's something to look at. So you wanna look at the channels themselves to see whether you might have potential risk. Now, one thing that we are now doing, and I encourage practitioners to do, is to review supply chain relationships. And this is, I'll talk about indemnification here in a minute, but that's not what I'm talking about. For manufacturers and distributors, a fair question is, is a "know your customer" approach appropriate? In gun sales, that are in commerce, in other words, ones that are sold by people in businesses seldom, the choke point of all, the one place everything comes together, is the retailer. The retailer's the one that is face to face with the customer. By the way, if you're new to the industry, new to this area, there are no gun sales by mail. Okay? You have to go to a gun store. You have to show your ID. You have to fill out an ATF form. You have to have a background check, with one exception, if you're a concealed carry permit holder. So the retailer is going to have the last best opportunity to prevent a bad sale. Those are the ones who are looking out for straw purchases. Those are the ones who say, "No, I'm sorry, but you're not yet 21, so you may not buy this handgun." They are the ones who like, as I say, the last best opportunity to stop a bad sale. So manufacturers and distributors, the fair question is, do you need to police, or monitor, or somehow understand the retailers who are selling your products? That's a fair question. How's a flip side of that. For a retailer, is it appropriate for you to review a manufacturer's marketing materials? For example, if you're selling a firearm, then the manufacturer has really problematic marketing materials, sales materials out there, doing advertising that is clearly targeted to minors, for example, you will be able to reduce your risk, I believe, by looking at those materials and deciding whether to sell the product. So that's another thing to look at within the supply chain. In regards to all supply chain partners, anybody you're dealing with, you should consider potential controls, assurances, diligence steps. If you're a manufacturer, it's easy to look up a retailer to see whether they have a web presence, to see, you know, where their store is. You can take steps to really take a look at your supply chain relationships and see if they are meeting your needs for risk mitigation. And by the way, all those steps that you would take would fit into the quote, unquote, reasonable controls that the California New Jersey and New York statutes are now requiring. All right, let's talk a little bit about some best practices. Let's talk about your website and social media issues. This is reflective of the marketing review compliance analysis of the website, social media platforms, et cetera, should be done and should be ongoing. Okay? An interesting thing about social media, is monitoring user comments, on the website, on social media. You may have someone who posts a comment on your website about a specific product that is highly, highly problematic. Could a third party's comment on your website be attributed to you if you leave it up? I can't say no to that. I don't know what the answer is with this, with these theories of liability, but monitoring and seeing what is being commented on, on your website and on your social media channels is very important. Also clients really do need to monitor their own employee's comments as well, a response to an inquiry, or a comment on a website, or social media channel that is from the company, especially needs to be evaluated. Let's go back to talk a little bit more about supply chain monitoring. As I mentioned before, a phrase that is just kind of getting some currency is "dealer due diligence" in the sense that the manufacturer conducts some actual due diligence on the dealers that they are doing business with, that are selling their products. And again, as I mentioned before, for retailers, a review of marketing materials is, it will reduce your risk. The question is whether it reduces it enough for the effort that's, that's a reasonable controls thing, right? Is, is, do you, make the decision to go ahead and start monitoring or reviewing your manufacturer's marketing materials? This is all again, when we're talking about these sorts of things, this is all a brave new world. With the new statutes that are in place and the new theories of liability, it's going to be tough for clients to figure out exactly what they did need to do. But the two things I think would be advice to a client in this area that you should consider is first, do something. Don't just ignore this. The probability, if you are selling a product that will make its way to California, New Jersey or New York, even if you're not selling in those states, is significant enough that you should do something to try to somehow some way identify potential risks and reduce them and incorporate procedures. So that's the first thing do something. The second thing is this is an ongoing effort. This is not something you can do in the fall of 2022 and come back and look at it five years later. It has to be an ongoing effort. Let's finally talk about some actual concrete, legal protections that clients should, steps they should take. The first of all, is insurance. There is insurance available for manufacturers, wholesalers, retailers. Coverage review is important. Checking the exceptions. Do you have a carve out, for example, for the types of lawsuits that we have here? Do you have protection if it is an enforcement action by an attorney General's office, that's the, those are the types of analyses that need to happen. The other thing for industry members to understand, and for their counsel to know to advise, is you really do need a broker who knows the firearms industry. Time and again, I have seen someone who has dealt with a broker who is not familiar with the industry, and they don't know how exactly to bind the coverage to make sure all those things that a firearms industry member deals with is covered. So that's a very crucial thing to do is to make sure that your broker knows the industry. And honestly, there's about, I know of about five nationwide that really know the industry and, and it's important to have somebody who's got that experience. All right. Let's once again, talk about supply chain. And the reason I keep coming back to this is I see many times in the firearms industry that the supply chain relationships, as a matter of legal documentation is less robust than I see in other other industries. So for those who are new to the industry, you have a three tier system in some regards in the sense of manufacturer, wholesaler, and retailer. Manufacturers often sell directly to retailers. And also manufacturers can sell directly to consumers. But again, that is using a retailer to run the background check on that. Okay? But here's the thing with the supply chain agreements, is you want to look for good or advocate for good indemnification provisions. The way I have advised clients, and the way I would recommend that you advise clients is whoever can control the risk the best should owe indemnification, if that risk is realized. For example, if there's a straw purchase, the retailer should indemnify the manufacturer for anything regarding that. Okay? If it's a product design defect, the manufacturer should indemnify the retailer. But at any event, having these indemnification provisions in place are crucial because there are many, many, many supply chain relationships within the industry that simply do not have anything regarding the indemnification. And then you're left with, for example, UCC article two, Principles and Common Law Indemnification, and those sorts of things. And of course, as we know, spelling out party's legal rights ahead of time is the best way to reduce uncertainty and risk. The final point on this is, if it's a significant enough relationship, it is worth as asking to be added as an additional insured on someone's policy. And that's a judgment call based upon the relationship, how significant the, the commerce between the two are and other factors. So that brings us to the conclusion of our presentation. It's as I say, and as I started out by saying, there's a lot of novelty and complexity in this area, I believe, I've probably given you a pretty good indication of that, but it is, it will be interesting to see how these things are hashed out in the courts. A lot of litigation going on a lot to keep up with, but I do appreciate you taking the time for this presentation. I hope it was useful. And, and thank you.

Presenter(s)

CW
Camden Webb
Partner
Williams Mullen

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