SAFETY Act Provides Sweeping Liability Limitations for Qualified Anti-Terrorism Products and Services
On July 11, 2003, the Department of Homeland Security ("DHS") issued its long-awaited proposed rule to implement Subtitle G of the Homeland Security Act of 2002, titled "Support Anti-terrorism by Fostering Effective Technologies Act of 2002" (the "SAFETY Act").
The SAFETY Act was designed to encourage companies to bring anti-terrorism technologies to market by providing sweeping liability limitations, and in certain cases, complete immunity for all third-party claims brought against Sellers of anti-terrorism technologies for damages resulting from terrorist acts. This protection applies for qualified anti-terrorism technologies that are sold to the federal government and state governments, and even to purely commercial sales. The liability limiting protections apply not only to the Seller of the technology but also to every entity that purchases that technology from the Seller. For these reasons, any company that intends to sell any product or service to any customer related to anti-terrorism activity should pay close attention to the statute and the proposed rule. In addition to the obvious benefit of being able to bring products to market that will be subject to (or immune from) limited third-party liability in the event of a terrorist act, the competitive advantage for such products compared to other products that have not received the government's "designation" or "approval" cannot be ignored.
To be clear, the proposed rule leaves as many questions unanswered as it attempts to answer. The text of the rule repeatedly asks for comments on a variety of issues that DHS is obviously still contemplating. Thus, we can expect changes and further clarifications from DHS. Nevertheless, it is important to note that while the July 11 action is a proposed rule and not an interim rule (i.e., the proposed rule is not yet in effect), DHS makes clear that it intends to implement an interim final rule very quickly after the very short 30-day comment period expires, and then it may seek further comments and issue supplemental rules.
Perhaps the proposed rule was a bit more ambitious than DHS intended. One of the more important aspects of the proposed rule is DHS' announcement that it would begin implementation of the SAFETY Act immediately with regard to federal acquisitions of anti-terrorism technologies, and that it would begin accepting all other SAFETY Act applications on September 1, 2003. Industry had been clamoring for the ability to submit applications to DHS to gain the protections of the SAFETY Act for some time. Unfortunately, one day after the proposed rule was issued, DHS announced that no applications for present federal procurements would be accepted now; all applications may begin to be submitted on September 1. Nevertheless, if you sell products or services that have an arguable connection to anti-terrorism activities, you should review this statute and the proposed rule carefully, and by all means, begin preparing your applications to qualify for the special treatment offered by the law.
Summary of SAFETY Act
The SAFETY Act creates certain liability limitations for all claims arising out of, relating to or arising from an act of terrorism where "qualified anti-terrorism technologies" are in use. The SAFETY Act provides the following six protections:
- Exclusive federal court jurisdiction for suits against the Sellers of "qualified anti-terrorism technologies;"
- A limitation on Sellers' liability of qualified anti-terrorism technologies to an amount of liability insurance coverage specified for each individual technology, provided that Sellers will not be required to obtain any more liability insurance coverage than is reasonably available "at prices and terms that will not unreasonably distort the sales price" of the technology;
- Elimination of joint and several liability for non-economic damages, so that Sellers may only be liable for that percentage of non-economic damages proportionate to their responsibility for the harm;
- A complete bar on punitive damages and prejudgment interest;
- A reduction of plaintiffs' recovery by amounts that plaintiffs received from "collateral sources," such as insurance benefits or other government benefits; and
- A rebuttable presumption that the Seller is entitled to the "government contractor defense."
The language of the SAFETY Act left it unclear whether all six of the protections outlined above applied to all "qualified" anti-terrorism technologies or whether the statute actually provided two separate but complementary sets of protections. The proposed rule makes clear that there are two sets of SAFETY Act protections, conferred upon Sellers by two separate actions by the DHS Secretary.
- All of the protections, except the rebuttable presumption of the government contractor defense, apply to those technologies "designated" by the Secretary as "qualified anti-terrorism technologies."
- The rebuttable presumption of the application of the government contractor defense is an additional protection that applies only to those qualified anti-terrorism technologies that are the subject of an additional "approval" by the Secretary under Section 863(d) of the SAFETY Act.
Thus, a technology may be "designated" as a qualified anti-terrorism technology and provide the Seller of that technology with the first five of the protections outlined above, but not gain the protection offered by the rebuttable presumption of the government contractor defense - an additional approval by the Secretary is required for that additional and very significant protection. The converse is not true; a technology may not be "approved" for application of the government contractor defense unless it is also "designated" as a qualified anti-terrorism technology.
The proposed rule also tells us that applications for "designation" as a qualified anti-terrorism technology and the application for the additional "approval" for the protection of the government contractor defense may be submitted simultaneously to the DHS and may be granted simultaneously by the Secretary. The proposed rule, also for the first time, gives us an address to submit the applications - the Assistant Secretary for Plan, Programs, and Budget of the Department of Homeland Security Directorate of Science and Technology.
Qualified Anti-Terrorism Technology"
The SAFETY Act applies to "technologies," not just products. It applies to services (including support services), software, information technology and all other technologies "designed, developed, modified, or procured for the specific purpose of preventing, detecting, identifying, or deterring acts of terrorism or limiting the harm such acts might otherwise cause." Thus, a technology that was not originally developed or designed for anti-terrorism purposes would be eligible for the Secretary's "determination" that it "qualifies" as an anti-terrorism technology subject to the protections provided under the SAFETY Act, if it were being procured "for the specific purpose" of preventing or deterring terror acts.
Neither the statute nor the proposed rules make clear whether the SAFETY Act's protections apply to a technology that might have been designed, developed or procured for several purposes, one of which is related to anti-terrorism, or whether the procurement, for instance, has to be solely for the purpose of anti-terror activities. For example, a particular solicitation for security guard services at a nuclear facility might indicate that the services are to provide protection for several purposes: to deter vandalism, to ensure safety of employees, and to deter acts of terrorism. While the security guard services were not procured for only the specific purpose of preventing a terror attack, preventing terrorism is a specific purpose for the procurement of the services. While the SAFETY Act should apply in such circumstances, it is not clear whether the SAFETY Act's protections would apply to such a multi-purpose "technology." Clearly, entities seeking protection of the SAFETY Act would be well advised to make certain that any procurement (federal, state, or purely commercial) specifies that one of the stated purposes for the procurement is to prevent, detect, identify or deter acts of terror or to limit the harm caused by such an act.
Another issue left unanswered by the SAFETY Act was whether its protections applied only to newly developed technologies or to existing technologies as well. The proposed rule clarifies that the SAFETY Act applies to new technologies, existing technologies, and to new applications of existing technologies. Thus, an existing biohazard detector in production for years may be eligible for SAFETY Act protection.
The SAFETY Act provides seven criteria that the Secretary must consider, to the extent applicable, in ruling on an application for "designation" as a qualified anti-terrorism technology: (1) prior federal government use or demonstrated substantial utility and effectiveness; (2) availability of the technology for immediate deployment; (3) the potential liability of the Seller; (4) the likelihood that the technology will not be deployed unless the SAFETY Act protections are conferred; (5) the risk to the public if the technology is not deployed; (6) evaluation of scientific studies; and (7) the effectiveness of the technology in defending against acts of terrorism.
Before the proposed rule was issued, some suggested that a given technology had to satisfy all of the criteria in order to be "qualified." Now, the proposed rule makes clear that that is not necessarily the case. The proposed rule states that the criteria listed in the statute are not exhaustive and that other factors may be considered. The proposed rule also introduces the concept that the Secretary may provide relative weights to different criteria depending upon the technology at issue and the threat it is intended to address. Finally, the proposed rule clearly states that the Secretary is not required to reject an application that fails to meet one or more criteria. Rather, the Secretary maintains considerable discretion to qualify a technology even if one or more of the statutory criteria are not met.
The proposed rule also suggests that a designation as a qualified anti-terrorism technology will last for five to eight years and may be renewed, but seeks comment on this proposed duration. The SAFETY Act does not contain any time limit on the length of the "designation." There appears to be no logical reason why there should be any temporal limitation on the designation as a qualified anti-terrorism technology - a technology that meets the criteria today and is afforded the protections of the statute, should be eligible for the same protection so long as the technology is in the stream of commerce.
Before the Secretary may designate a technology as a qualified anti-terrorism technology, he must examine the amount of liability insurance the Seller intends to maintain for coverage of the technology and certify that the coverage level is appropriate to satisfy otherwise compensable third-party claims that may be caused by an act of terrorism when qualified anti-terrorism technologies have been implemented. The SAFETY Act also provides that Sellers are not required to obtain insurance in excess of the maximum amount reasonably available that would not unreasonably distort the sales price of the anti-terrorism technology.
The proposed rule states that the Secretary does not intend to set a numerical "one-size-fits-all" level of insurance requirement for all technologies. Rather, the required level of insurance will be determined on an application-by-application basis and will be based upon the examination of several factors, including: "the amount of insurance the Seller has previously maintained; the amount of insurance maintained by the Seller for other technologies or for the Seller's business as a whole; the amount of insurance typically maintained by sellers of comparable technologies; data and history regarding mass casualty losses; and the particular technology at issue." The proposed rule also suggests that the Secretary might confer with the Seller, and insurance carriers, to determine the appropriate level of insurance to require for a particular application.
The proposed rule recognizes that over time the appropriate level of insurance may change based on the market for insurance, the predominance of a particular threat, and other factors. Accordingly, the Seller is allowed to seek reconsideration of the insurance required.
The ramifications for not maintaining the required level of insurance are also addressed in the proposed rule. If a Seller allows its insurance to fall below the required level of insurance, the protections of the SAFETY Act will still apply. However, the maximum liability of the Seller remains at the required level of insurance so the Seller may be subjecting itself to an uninsured liability. In addition, allowing the insurance to fall below the required level will be regarded as a negative factor by the Secretary for any future application for renewal of the SAFETY Act protections and might be considered as a negative factor for any other SAFETY Act applications submitted by the same Seller. Again, it is not clear why the Seller would be punished in such a fashion for not maintaining the required level of insurance.
Government Contractor Defense
While the protections available for qualified anti-terrorism technologies significantly limit the liability of a Seller of qualified anti-terrorism technologies, the additional protection available under the SAFETY Act of the rebuttable presumption of the government contractor defense provides total immunity to Sellers of qualified anti-terrorism technologies, and their customers, that are also "approved" by the Secretary for this additional protection.
The presumption of the government contractor defense applies to all "approved" qualified anti-terrorism technologies for all claims brought in any kind of lawsuit "arising out of, relating to, or resulting from an act of terrorism when qualified anti-terrorism technologies . . . have been deployed in defense against or response or recovery from such act and such claims result or may result in loss to the Seller." While the government contractor defense is a judicially created doctrine requiring the Seller to prove essential elements in order to qualify for the defense, the SAFETY Act supplants the case law so that once the Secretary "approves" the application for this additional protection, the government contractor defense applies.
Significantly, the statutory government contractor defense available under the SAFETY Act provides immunity not only against all claims that might be brought by third parties relating to sales to the government, it also applies to purely private transactions. Thus, once the Secretary "approves" a qualified anti-terrorism technology for this additional protection, the Seller is immune from liability relating to sales of that technology in the commercial sector.
Moreover, under the case law, the government contractor defense is available only if the contractor manufactured the product in question in accordance with reasonably precise federal government specifications. Under the SAFETY Act, that is not the case. In reviewing an application, the Secretary will perform a "comprehensive review of the design of such technology and determine whether it will perform as intended, conforms to the Seller's specifications, and is safe for use as intended." The Act also provides that the Seller will "conduct safety and hazard analyses" and supply such information to the Secretary.
Thus, unlike the judicially created government contractor defense, the statutory government contractor defense will protect Sellers of technology in the commercial marketplace and will allow qualified anti-terrorism technologies to be approved for such treatment even if a federal specification is not involved.
The proposed rule clearly adopts the broad protections provided by the case law to the SAFETY Act's version of the government contractor defense. The proposed rule recognizes that the scope of the defense is very broad, and expressly states that Sellers of "approved" qualified anti-terrorism technologies cannot be held liable under the SAFETY Act for design defects or failure to warn claims (unless the presumption is rebutted by evidence that the Seller acted fraudulently or with willful misconduct in submitting information to the Secretary in connection with its application).
As noted above, applications to gain this protection may be submitted simultaneously with the application for "designation" as a qualified anti-terrorism technology. The immunity provided by the statutory government contractor defense is a remarkable protection afforded to sellers of anti-terrorism technologies, and we expect most sellers of such technologies to submit applications.
The proposed rule states that the Secretary's decision to "designate" or "approve" (or not to designate or approve) an anti-terrorism technology is final and not subject to judicial review. This is curious and it is unclear whether this preclusion of judicial inquiry would withstand a judicial challenge. Typically, final agency actions are subject to judicial review under the Administrative Procedures Act ("APA") unless the court would be left with no standards to apply in undertaking such a review of the agency's actions. Here, the standards to be considered by the Secretary in making the determinations are stated in the statute and amplified in the proposed rule. It would appear that a court would have ample benchmarks to judge the propriety of the Secretary's actions under the SAFETY Act and thus, APA review would be appropriate.
We also can expect battles over the issue of whether a particular technology is covered by a "designation" or "approval." For example, if a simple manufacturing defect causes the product sold to differ from the product approved or designated, we can expect plaintiffs to argue that the product in the marketplace is different than the product reviewed by the Secretary and thus is not subject to the protections conveyed to the designated or approved product. Neither the statute nor the proposed rule address the issue of how minor deviations due to simple manufacturing defects from the designated or approved product will be treated under the SAFETY Act.
The SAFETY Act creates a single cause of action with exclusive jurisdiction in a federal district court. As a result, we might expect to see plaintiffs suing in foreign countries whenever possible to avoid the liability limitations of the Act. Careful consideration of corporate structure will be necessary to ameliorate this possibility and to keep federal causes of action in the United States.
Hopefully, these and the other open issues will be addressed in the subsequent rules to be issued by DHS.
The SAFETY Act is perhaps the most significant piece of tort reform legislation ever enacted. For qualified anti-terrorism technologies, liability is capped at the insurance levels required by the Secretary and other limitations on damages and the types of causes of action also apply. The additional protection provided by the rebuttable presumption of the statutory government contractor defense provides total immunity to Sellers of qualified anti-terrorism technologies that are "approved" for this additional protection, and to their customers.
Industry has awaited guidance from the DHS on how it was going to implement these protections. For the most part, companies have been wary to provide anti-terrorism technologies to the government until such companies could apply for and take advantage of the SAFETY Act protections. The risk of third-party liability was simply too high and the availability of insurance was too expensive or unavailable to justify the introduction of such technologies. Until now, applications that were submitted were rejected by DHS and interested companies were told to wait until the regulations were issued.
Make no mistake about the significance of this law. Because the SAFETY Act protects Sellers of qualified anti-terrorism technologies, and every entity that purchases such technologies from that Seller, the SAFETY Act "designation" and the additional "approval" relating to the government contractor defense, may soon become the equivalent of the Good Housekeeping Seal of Approval. Without a "designation," potential buyers may be very wary of purchasing your products especially if a competitor has received such a "designation."
Now, the proposed rule clarifies two important issues. First, applications for SAFETY Act protections may be submitted beginning on September 1, 2003. Second, the SAFETY Act provides two levels of protection, not one. A technology may be "designated" as a qualified anti-terrorism technology without being "approved" for the additional protection proffered by the rebuttable presumption of the statutory government contractor defense.
While many issues remain to be resolved, the time is now to begin preparing applications for SAFETY Act designation and approval.
For more information on the SAFETY Act, the proposed rule, or help in preparing applications under the SAFETY Act, please contact Jacob B. Pankowski, Team Leader of Nixon Peabody LLP's Government Contracts Team, at 202.585.8181 or email@example.com.