The U.S. Supreme Court recently ruled that the families of victims of the 2012 Newtown, Connecticut, school shooting can sue gun manufacturer Remington Arms. In doing so, the court risks opening the floodgates for plaintiffs' attorneys to begin suing firearms companies for how they market their guns.

Although the case hasn't established any liability yet for Remington, which is privately held, the court's failure to review the case allows the families to proceed with their lawsuits alleging the gunmaker violated Connecticut's consumer-product protection laws for the way it marketed its firearms.

It also means the Connecticut Supreme Court's ruling that the state's unfair trade practices law applies to gunmakers could make them accountable for the actions of criminals. Investors are right to be concerned about the fallout.

A handgun lying on top of the U.S. Constitution

Image source: Getty Images.

Competing interpretations of the law

Congress sought to protect gunmakers from frivolous lawsuits and in 2005 enacted the Protection of Lawful Commerce in Arms Act (PLCAA), which shields gunmakers from liability for "criminal or lawful misuse" of their firearms. It did carve out several exceptions, though, such as for product design or manufacturing defects, negligently selling a gun to someone they know is going to commit a crime, and for knowingly violating federal or state laws regarding the sale or marketing of guns. It's under that last part that the plaintiffs are suing Remington.

The Connecticut Unfair Trade Practices Act (CUTPA) bars marketing products that encourage violent or criminal acts. The plaintiffs argue that Remington used "militaristic marketing" for its Bushmaster XM15 rifle, the gun used by troubled youth Adam Lanza, who shot and killed 20 children and six adults at the Sandy Hook Elementary School. They allege that advertising using phrases such as "the ultimate military combat weapons system," and featuring images of silhouetted soldiers, made someone like Lanza susceptible to choosing the rifle for his crimes.

In siding with the plaintiffs, the Connecticut court held that the PLCAA doesn't prohibit plaintiffs from pursuing the "single, limited theory" that Remington violated CUTPA by marketing the Bushmaster rifle to civilians for criminal purposes, and that the advertising led to the shooting.

Waging a war on guns

The Bushmaster rifle is of a type known as an AR-style semiautomatic weapon. Although often called "assault rifles," that's a misnomer because assault rifles are actually machine guns and have been heavily regulated since 1934; civilian ownership of them was banned in 1986.

The AR stands for the original manufacturer of the rifle, ArmaLite, and it is the most popular firearm in the country, with about 16 million Americans owning one. The rights to the original AR-15 were sold to Colt's Manufacturing, which modified it and sold it to the U.S. military as the M16 automatic rifle. It then made a civilian version, which is why the rifle is often confused with a military weapon, but the resemblance is only cosmetic.

By law, the AR is no different internally than any other semiautomatic rifle on the market. Just like regular hunting rifles, it fires one bullet at a time with each trigger pull, and has the same firepower.

An unseemly relationship

What the lawsuit against Remington suggests is that the gunmaker's marketing for the Bushmaster was different from that used for its other weapons designed for lawful purposes, such as self-defense, hunting, or even target practice. Instead the suit suggested that the Bushmaster was marketed for launching offensive assaults against one's enemies.

That ought to be a far bridge to cross: convincing juries that simply marketing a firearm based upon its military heritage is the same thing as encouraging someone to commit a crime or kill someone. Fiat Chrysler Automobiles (NYSE:FCAU), for example, notes that the "X" styling of the Jeep Renegade's taillights is "infused with classic military themes," yet no reasonable person suggests holding the carmaker liable for injuries caused by drunk drivers or bank robbers fleeing the scene of the crime.

Plenty of products are associated with our wartime past, and it's unimaginable that those companies could be held liable for some tangential relationship to a crime. But that's what Remington and the firearms industry are facing, and is likely what more enterprising trial lawyers are now considering.

A costly outcome

Because we're in a cultural climate with escalating passions, the potential is ripe for retribution against a "deep pockets" party to pay for a tragedy. American Outdoor Brands (NASDAQ:AOBC), the owner of Smith & Wesson, already accrued some $3.3 million in litigation liabilities while Sturm, Ruger (NYSE:RGR) spent $1.5 million last year defending itself against various lawsuits last year. Those figures could rise dramatically now that a path has been blazed around the PLCAA.

The firearms industry hasn't been brought to its knees by the Supreme Court's decision, but it's more wobbly than it was. Investors should watch to see whether a tsunami of lawsuits follows in its wake.