Contact: Ryan Hardy; Spencer Fane Britt & Browne LLP (Missouri, USA)
Here at the Manufacturer’s Corner, we typically focus on litigation avoidance rather than litigation tactics. After all, this column is written for manufacturers, not lawyers. But we want to take a moment to address a procedure called “vouching in,” because (a) it can be a useful tool for you, and (b) if somebody is trying to vouch you into litigation, you need to recognize what is happening and understand the consequences.
To understand vouching, consider this example. You buy a widget from SellCorp. You incorporate that widget into your product, which you then sell to BuyCorp. BuyCorp sues you, claiming that your product breached the implied warranty of merchantability. After reviewing the allegations, it looks to you as though the source of the alleged problem may have been the widget from SellCorp, and that SellCorp may be liable to you for some or all of the claimed damage. This is where vouching comes in: you can demand that SellCorp come in and defend you in the litigation. If SellCorp doesn’t do so, and you then file a separate action against SellCorp, SellCorp will be bound by any factual determinations made in the lawsuit between you and BuyCorp.[1] This is the power of vouching in.
Let’s discuss the mechanics of vouching in, and then we can discuss the potential benefits and risks associated with the process. To vouch SellCorp into the litigation, you must give SellCorp written notice of the litigation as early as possible, state that SellCorp may come in and defend, and – this is critical – state that if SellCorp does not come in and defend, that it will be bound in any action by you to any determination of fact common between the two litigations.[2] At that point, the burden is on SellCorp to come in and defend.
The primary benefits of vouching in are clear: if SellCorp accepts the tender, you get a defense; if it does not, you will have a fairly clear path to establishing liability against SellCorp in a subsequent action.[3] Vouching in can also be a particularly powerful tool if SellCorp is not subject to personal jurisdiction in the venue in which BuyCorp sued you, but that’s an issue that’s primarily of interest to lawyers, and they can meet me in the footnotes to read my thoughts on that.[4] Finally, there is some authority holding that vouching in SellCorp is mandatory if you are to be entitled to recover your attorneys’ fees from the BuyCorp action as consequential damages in the subsequent action against SellCorp.[5]
What about the risks? For one, if SellCorp accepts your invitation, you lose some control over your defense (though this risk can be mitigated by keeping your own counsel up-to-date). For another, it has been suggested that SellCorp’s attorney may not have properly-aligned incentives, in that SellCorp would be pleased for BuyCorp to present a theory of the case that does not implicate SellCorp’s widget.[6] Third, you must litigate two actions, whereas you would only need to litigate one if you sued SellCorp as a third-party defendant in the BuyCorp action.[7] Fourth, it is not clear that SellCorp would be bound to anything if you settle the BuyCorp action, rather than take it to trial.[8] If settling the action is a likely outcome, you would be wise to sue SellCorp as a third-party defendant to enhance the prospects of a global settlement.
So, what should a manufacturer take away from this? The first important point is that you must recognize a vouching letter when you receive one. If you’re in the position of SellCorp, you need to understand that what you may initially read as a mere demand for indemnity may lead to consequences that you wouldn’t typically anticipate arising from denying such a demand. The second is that, if you are in a position where vouching may be appropriate, you need to raise that issue with your counsel. Vouching is an underutilized and, frankly, often overlooked tool. Third, your counsel may have great reasons not to vouch in your seller, so be sure to discuss the issue with them before sending the demand.
[1] To the extent those facts are at issue in both suits, that is.
[2] Note that while you may also include a demand for indemnity with your letter, vouching in is not the same as indemnity, so do not make the common mistake that a request for indemnity and tender of defense meet the UCC’s requirements for vouching in.
[3] Sort of. Remember that SellCorp will only be bound by factual determinations. Even if the jury in the BuyCorp action finds through special interrogatories that the SellCorp widget was the cause of the problem, you will still need to establish that the sale of the defective widget was actionable – whether through breach of warranty or some other theory. You can see the residual risk here. Say the widget breached the warranty of merchantability, but SellCorp properly disclaimed that warranty. SellCorp is bound to the determination that the widget was defective, but may still prevail in the subsequent action.
[4] Obviously impleader is right out if the Court doesn’t have personal jurisdiction over SellCorp. But the vouching letter isn’t process, and the better view is that SellCorp need not be subject to personal jurisdiction in the state where BuyCorp sued for vouching in to be effective. Thus, you can use vouching in to persuade an entity not otherwise subject to personal jurisdiction in a particular forum to subject itself to jurisdiction there anyway.
Professor Hawkland (2 Hawkland UCC Series § 2-607:9) suggests the jurisdictional issue is of minimal importance because of the expansive scope of state long-arm statutes and recent minimum contacts analyses. I disagree. To the extent he’s relying on Asahi and its progeny to establish personal jurisdiction on a stream of commerce theory, I think a careful attorney must give close examination to whether Asahi and similar cases would still hold up in light of the Court’s current views on personal jurisdiction evidenced in, for example, Daimler AG v. Bauman.
In any case, jurisdiction isn’t the only forum issue to consider. Many sales contracts will include a binding forum selection clause that could preclude impleader even if personal jurisdiction were otherwise available. Vouching can be an effective way to get SellCorp to waive the forum selection clause.
[5] See Kaiser Aluminum & Chem. Sales, Inc. v. PPG Indus., Inc., 42 F.3d 1147 (7th Cir. 1994) (applying Texas law). This holding rested on the peculiar conclusion that, under Texas law, the vouching in procedure is mandatory.
[6] That’s Professor Hawkland again (2 Hawkland UCC Series § 2-607:10). I understand this concern and share it, but it presents no risk different than one presented by an insurer tendering a defense under reservation of rights, except that you lack the right to demand a final opinion on “coverage.”
[7] Query whether, as a tactical matter, you want to present a third-party claim to the same jury hearing the underlying claims by BuyCorp. Do you really want to say to a jury “our product was fine, but if it wasn’t, it was all SellCorp’s fault”? Your trial attorney can take steps to mitigate this risks associated with that strategy (e.g. bifurcation or severance), but those steps aren’t necessarily going to be allowed by the trial court.
[8] It probably would not be bound.
