Lithium-Ion Battery Failures: Suggestions for Product Manufacturers to Mitigate Liability Risk

Product Safety & Liability ReporterrTM

VOL. 45, NO. 10 MARCH 6, 2017

BATTERIES

RISK MITIGATION

As lithium-ion batteries are widely used and have known potential risks, product makers need to take steps to manage hazards, reduce the possibility of consumer injury or property damage, and protect their reputations, attorneys Kenn Brotman and Scott G. Kobil say. The authors offer advice on steps to manage risks and reduce exposure.

Lithium-Ion Battery Failures: Suggestions For Product Manufacturers to Mitigate Liability Risk

expense of recalls or investigations (not to mention lawsuits) but also the bad publicity and loss of consumer trust. As news reports expose various, albeit limited, incidents of property damage or personal injuries associated with lithium-ion batteries, numerous attorneys across the internet advertise their experience with lithium-ion related lawsuits. Frequently, the target of these lawsuits is not the manufacturer of the battery itself but rather the manufacturer of the larger product that uses the battery. With the proliferation of lithium- ion batteries, it may be just a matter of time before a fire on an airplane, a cruise ship, or a high-rise building leads to significant property damage or, far worse, ex- BY KENN BROTMAN AND SCOTT G. KOBIL poses a large number of people to possible death or in- ighly publicized incidents involving lithium-ion jury. Although sellers of lithium-ion powered products battery fires have necessitated large-scale and that experience failures cannot avoid lawsuits alto- H costly recalls, or highly publicized investigations, gether, there are steps that can be taken to manage the requiring product manufacturers to incur not only the risk or reduce exposure.

Kenn Brotman is counsel in K&L Gates’ Chi- What Is A Lithium-Ion Battery cago office, where he focuses his practice on product liability, premises liability, general And Why Can It Fail? tort liability, and complex commercial litigation, including breach of warranty, breach of A lithium-ion ‘‘cell’’ comprises (1) a positively contract and breach of fiduciary duty matters. charged electrode, typically lithium oxide; (2) a negatively charged electrode, typically porous carbon or Scott G. Kobil is counsel in K&L Gates’ New- graphite; and (3) an electrolyte conductor, typically a ark office, where his practice includes product lithium salt in an organic solvent. When the cell liability, employment, and commercial litiga- charges, the positively-charged electrode gives up some tion matters. His clients include manufac- of its lithium ions, which move through the electrolyte turers and corporate defendants. to the negatively-charged electrode. When the cell dis- charges, the ions move in the opposite direction, pro-

COPYRIGHT ஽ 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. ISSN 0092-7732 2 ducing energy that powers the cell. A lithium-ion ‘‘bat- claims or business losses caused by problems with the tery’’ (or ‘‘battery pack’’) is a collection of cells, along lithium-ion batteries. Product manufacturers and retail- with housing and electrical connections. ers should include indemnification provisions within Lithium-ion batteries have a high-energy density, ow- their vendor agreements or as part of their purchase or- ing in part to lithium being the lightest metal and least ders. The scope of an indemnification provision should dense solid element. This high-energy density enables be negotiated with the vendor. Obviously, business fac- lithium-ion batteries to store greater energy over longer tors will dictate the extent to which a vendor will agree periods of time compared to traditional batteries. On to a broad indemnification provision. For example, the other hand, lithium’s chief disadvantage is that it is whether a battery manufacturer will agree to indemnify a highly combustible material. For example, in a the product manufacturer for all losses (including per- lithium-ion battery, an individual cell can get so hot that sonal injuries, investigations, recalls, business losses, it actually catches fire. The fire increases the heat, and reputational injuries related to battery fires) will which causes the fire to spread to the next cell and get likely be related to the size and length of the underlying even hotter — a chain reaction referred to as ‘‘thermal business transaction. Regardless, a product manufac- runaway.’’ Ultimately, the entire battery can quickly turer should confirm that the battery producer is willing catch fire or explode. In response to consumers’ in- to stand behind its product through the provision of an creasing demand for batteries that last longer, manu- indemnification agreement. facturers have packed battery cells closer together, Once the terms and scope of the indemnification pro- which increases the battery charge but also increases vision are agreed upon, the product manufacturer the chance of thermal runaway. should require that the battery manufacturer provide In order to limit the risk of thermal runaway, lithium- proof of adequate insurance to cover potential losses, ion batteries are designed so that they cannot be and that the product manufacturer and/or retailer is a charged too fast (doing so increases the risk of starting properly named additional insured. While a Certificate the thermal runaway process) and placing dividers be- of Insurance is frequently viewed as sufficient for this tween cells to limit the spread of heat from a malfunc- purpose, reviewing the policy language itself, particu- tioning cell. Other safety features include temperature larly with regard to coverage of additional insureds, is sensors, chips, circuits, and vents that monitor heat and strongly encouraged because Certificates of Insurance regulate electrical power to help ensure the batteries do can contain errors and may or may not modify or vary not overheat. the terms of the actual policy. Consideration should In addition to safety features within lithium-ion bat- also be given to the identity and reputation of the in- teries, research is currently being performed on the vi- surer providing coverage. In the event that an insurer ability of new battery sources that may be cheaper, refuses coverage if a loss occurs, initiating a coverage more effective, and safer than lithium-ion batteries. For action against a foreign insurer may be challenging. For example, there is promise that lithium-sulfur may be this reason, a manufacturer should consider using a the next ‘‘big thing’’ in battery development. Such tech- vendor agreement that mandates that (1) the vendor nologies are still years away, however. For this reason, maintain sufficient insurance coverage from an insurer until other effective power sources are available (i.e., carrying at least a certain A.M. Best rating (e.g., ‘‘A’’) sources having a high-energy density that can still be and (2) the insurer must agree to name the product used safely), certain practices should be considered manufacturer as an additional insured. when incorporating lithium-ion batteries into products. After requiring and reviewing applicable insurance coverage, the product manufacturer should remain dili- gent throughout the relationship with the battery ven- Proactively Mitigate Against dor. Insurance policies typically cover either ‘‘occur- Battery Failure in Your Products rences’’ that arise at least in part during the policy period, or ‘‘claims made’’ within the policy period or a The first line of defense against lithium-ion failures is contractually bargained-for extended reporting period. to know your battery supplier. Since the mass produc- The manufacturer should require that proof of coverage tion of lithium-ion batteries started in the 1990s, it has for each successive policy period be provided by the become a high-volume, low-margin industry. Economic vendor, and records of such proof should be maintained factors have caused some battery manufacturers to cut by the product manufacturer. Each time proof of cover- corners with some of the available safety measures. age is provided, it should be reviewed to ensure that it Therefore, it is important for product manufacturers to names the manufacturer as an additional insured and investigate their battery suppliers thoroughly. Manufac- covers the agreed-upon scope of the indemnification turers should become familiar with the battery manu- provision. facturing process and work with the supplier to ensure However, simply relying upon a vendor or its insurer that the lithium-ion batteries are properly manufac- can leave a product manufacturer exposed if the vendor tured to minimize the risk of thermal runaway. and/or its insurer refuses to defend and indemnify the When selecting a battery supplier, a manufacturer manufacturer, or if the alleged loss exceeds the ven- should ensure that the battery manufacturer will accept dor’s coverage. For this reason, it is important for the financial responsibility for costs and potential liability manufacturer to maintain its own insurance and to con-

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3-6-17 COPYRIGHT ஽ 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. PSLR ISSN 0092-7732 3 firm that its insurance properly covers defects caused Efforts should also be made by the manufacturer to by a component part that was incorporated into the fi- secure the return of the product allegedly involved in nal product. Excess layers of insurance should also be the fire so that it can be carefully examined by product obtained by the manufacturer whenever possible to engineers or those intimately familiar with the product. cover large losses. It is critically important that the allegedly defective Of course, even with proper indemnification agree- product be preserved and a chain of custody main- ments and insurance in place, product manufacturers tained so that it can be used as evidence in any future should provide instructions and warnings to end-users litigation. If destructive testing or analysis is required, it as necessary. To do this, manufacturers must under- is essential that counsel for the manufacturer be noti- stand the practical and environmental limits of their fied and involved in the process. Counsel will assure batteries. For example, because temperature impacts that the consumer’s counsel and any appropriate gov- the efficiency and safety of lithium-ion batteries, manu- ernment agency are informed of the testing. It may also facturers should notify consumers about recommended be appropriate to involve the battery manufacturer temperatures for safe operation and storage of their and/or its counsel. Failure to notify the appropriate par- products. They should also advise that dropping or ties of destructive testing can result in the test results damaging the product could harm the battery, necessi- being inadmissible in a future trial, or even worse, sanc- tating inspection or replacement by an authorized prod- tions imposed against the manufacturer for destruction uct representative or dealer. Working with the battery of evidence. Regardless of whether opposing counsel, vendor to thoroughly understand the limitations or haz- their experts, or government officials elect to observe ards associated with the battery will help the product the testing, it should be thoroughly documented (by manufacturer create appropriate warnings and instruc- photography and/or video) at each step of the process. tions. If the consumer refuses to return the product to the Both the product manufacturer and the battery manufacturer, the manufacturer should insist that the manufacturer should carefully maintain records related consumer retain the product and notify the manufac- to all testing performed on the batteries throughout turer of any intended testing or analysis. Once notified, both the design and manufacturing phases. To the ex- the manufacturer should have a product engineer or re- tent possible, the product manufacturer should seek to tained expert attend and observe the inspection and coordinate with the battery manufacturer, or create a testing of the product. system of its own, to track which batteries are going Post-incident inspection and analysis can reveal into which products. With properly maintained records, whether (1) the battery was a cause of the alleged inci- it can be determined whether defects are limited to a dent or fire; (2) the battery was damaged, altered or re- particular production run or time frame or whether placed prior to the incident; or (3) the product was there are broader problems with the design or the modified by the consumer after it was sold. If a design manufacturing process. or manufacturing defect is found, the extent of the With a little planning and attention to potential issues problem should be investigated to determine whether it with lithium-ion batteries, product manufacturers can is product-wide or only related to a specific group- reduce the likelihood of battery-related fires, and miti- manufacturing run of the product. This will also help gate risk should such an unfortunate incident occur. the company and legal counsel determine whether the Consumer Product Safety Commission should be noti- Respond Appropriately fied of the problem, and whether a recall is necessary. When Adverse Incidents Occur Frequently, an investigation or inspection of one iso- lated incident does not reveal enough information to de- Even with careful planning, preparation, and re- termine whether the issue is endemic. For this reason, search, problems can still occur. How a company reacts it is important to track all incidents so trends can be to adverse incidents can be as important as what it does identified and analyzed. However, this should be done to prevent them. A product manufacturer should react only in consultation with product liability counsel in or- quickly when it learns of a potential problem with its der to ensure that the scope of the information con- products. tained in the records is proper or perhaps even pro- Upon receiving a report of an adverse product inci- tected by the attorney-client privilege where appropri- dent, the manufacturer should initiate an investigation. ate, as most plaintiff attorneys will seek disclosure of Contacting the consumer or investigating agency will other incidents related to the same or similar products. help to uncover some of the basic facts. For example, Finally, upon learning of a product-related incident contacting a local fire department or fire investigator that caused personal injury or property damage, the can help confirm or refute whether the manufacturer’s manufacturer should notify its insurer, the component product was involved in the incident or whether the in- manufacturer, and the component manufacturer’s investigator has identified the ignition source of the fire. surer if the manufacturer has rights under the compo- Speaking to the consumer also demonstrates the manu- nent manufacturer’s policy(ies). Insurance policies facturer’s interest in the situation. While apologies or have notification time limitations. The failure to timely promises to ameliorate any problems should not be of- notify the insurers could result in coverage being lim- fered unless and until the investigation reveals a need ited in scope or denied altogether. Early retention by to do so, expressing concern for the situation not only experienced insurance coverage counsel may help ame- protects the company’s reputation but also assures the liorate these risks. If for any reason an insurer declines consumer that the company cares and is taking the mat- coverage or refuses to defend the manufacturer in a ter seriously. This can translate into greater coopera- lawsuit, insurance coverage counsel should be con- tion and less animosity between the customer and the sulted to determine whether the carrier’s position is le- manufacturer, thereby reducing the possibility that a gally supported under both the policy language and the lawsuit will be filed. applicable jurisdiction’s law.

PRODUCT SAFETY & LIABILITY REPORTER ISSN 0092-7732 BNA 3-6-17 4

Because of the known potential risks and widespread der to manage the risk, reduce the possibility of con- use of lithium-ion batteries, a product manufacturer sumer injury or property damage, and protect its repu- should incorporate the above recommendations in or- tation.

3-6-17 COPYRIGHT ஽ 2017 BY THE BUREAU OF NATIONAL AFFAIRS, INC. PSLR ISSN 0092-7732