APPENDIX F
TORT LAW, DETERRENCE AND INNOVATION: TOO MUCH OR TOO LITTLE?

Michael D. Green42

The role that law plays in technological development is sometimes obscure but generally pervasive and fundamental. The existence of "law" as the glue that holds society together, avoiding anarchy and permitting stable and cooperative relationships to form, is a necessary condition for the modern interdependent society. Patent law, for example, gives inventors a monopoly, thereby enabling them to retain the benefits of their developments and providing financial incentives for research and innovation.

Complicating an assessment of law as technology enhancer in the construction and building context are the scope and variety of legal rules applicable to the building and construction industry in this country. In part this is due to fragmentation in the industry, which consists of a variety of commercial contractors, subcontractors, architects and engineers, residential home builders of stratified size, and manufacturers of the various materials and products used in construction. There is no such thing as "construction law," but rather bits and pieces of many diverse strands of law, which may be brought to bear on the many aspects of construction. Contract law governs the relationships among the many entities that must cooperate to produce a completed structure. Tort law plays a significant role in determining who will bear losses arising from unanticipated risks, including accidental injuries, thereby creating incentives for risk-reducing behavior. Various federal and state regulatory agencies, such as the Occupational Safety and Health Administration, have authority over pieces of the construction process.

42  

Professor of Law, University of Iowa



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The Role of Public Agencies in Fostering New Technology and Innovation in Building APPENDIX F TORT LAW, DETERRENCE AND INNOVATION: TOO MUCH OR TOO LITTLE? Michael D. Green42 The role that law plays in technological development is sometimes obscure but generally pervasive and fundamental. The existence of "law" as the glue that holds society together, avoiding anarchy and permitting stable and cooperative relationships to form, is a necessary condition for the modern interdependent society. Patent law, for example, gives inventors a monopoly, thereby enabling them to retain the benefits of their developments and providing financial incentives for research and innovation. Complicating an assessment of law as technology enhancer in the construction and building context are the scope and variety of legal rules applicable to the building and construction industry in this country. In part this is due to fragmentation in the industry, which consists of a variety of commercial contractors, subcontractors, architects and engineers, residential home builders of stratified size, and manufacturers of the various materials and products used in construction. There is no such thing as "construction law," but rather bits and pieces of many diverse strands of law, which may be brought to bear on the many aspects of construction. Contract law governs the relationships among the many entities that must cooperate to produce a completed structure. Tort law plays a significant role in determining who will bear losses arising from unanticipated risks, including accidental injuries, thereby creating incentives for risk-reducing behavior. Various federal and state regulatory agencies, such as the Occupational Safety and Health Administration, have authority over pieces of the construction process. 42   Professor of Law, University of Iowa

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The Role of Public Agencies in Fostering New Technology and Innovation in Building Among these several strands, tort law stands out. Highly publicized litigation and spectacular claims of risk and damage from asbestos and other building products, design and construction errors, and various manifestations of ''sick building syndrome" and other operational hazards have been part of a "tort crisis"43 that is purported to have a stifling effect on innovation in a broad spectrum of productive activity in this country. Many critics, from both the left and the right, are harsh in their assessment of tort law and would replace or restructure it in significant ways.44 The critique that is most relevant to issues of new technologies and innovation in the construction-related industries is that tort law has greatly increased the costs of certain activities, driven useful products off the market, stifled innovation because of fears of liability, and harmed industry's ability to compete in an international marketplace. One particular variant of this critique is that tort law is biased against high-technology, mass-produced, widely dispersed risk—so-called public risk. By contrast, private risks—those of 43   The most recent crisis appeared to peak around 1985–1986, just about a decade after the crisis of the 1970s. 44   The most strident critic on the right is Peter Huber of the Manhattan Institute, who recently published a scathing critique of developments in tort law over the past several decades. P. Huber, Liability: The Legal Revolution and Its Consequences (1988). Huber has condemned modern products liability law as the "courts' . . . most ignominious failure." Id. 171. Judge Alex Kozinski of the United States Court of Appeals for the Ninth Circuit, in a review of Huber's work wrote that it "is a tale of hubris and greed: hubris on the part of the Founders [the common law judges who developed modern products liability], who unhesitatingly swept aside legal rules distilled through the collected wisdom of generations of common law jurists; greed in abundance on the part of the tort lawyers who eagerly pressed the frontiers of liability outward." Kozinski, Torts Are No Piece of Cake, Wall St. J., Oct. 6, 1988, at 16, col. 5. Huber, and a number of other prominent critics, favor a move toward contract-like or contract-mimicking arrangements for allocating the risk of accidental injury. Coleman, A Market Approach to Products Liability Reform: A Theoretical Synthesis, BNA Prod. Safety & Liab. Rep. 463 (May 5, 1989); Schwartz, Proposals for Products Liability Reform: A Theoretical Synthesis, 97 Yale L.J. 353 (1988). On the left, Stephen Sugarman would do away with the tort system in favor of a no-fault compensation scheme. See, e.g., Sugarman, Doing Away with Tort Law, 73 Calif. L. Rev. 555 (1985). Professor Jeffrey O'Connell has advocated adoption of no-fault compensation systems for the past quarter century. See, e.g., R. Keeton and J. O'Connell, Basic Protection for the Traffic Victim (1965).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building personally controlled, old and familiar mechanisms—receive less concern, yet paradoxically are less safe. For example, the public outcry over asbestos in schools and public buildings (a public risk) has resulted in its removal, even in instances when it would be safer to leave it in place. This bias, according to the critique, stifles progress, not only depriving us of the benefit of new technology, but also leaving us with greater residual risk.45 This appendix considers the role that tort law plays in affecting commercial behavior. The impact of these behavioral changes on innovation, primarily as the end product of the research and development process, and the international competitiveness of domestic firms frame the inquiry. The primary focus of this discussion is the subset of tort law known as products liability, which governs the liability of manufacturers and sellers of products. This area has rapidly developed over the past quarter of a century, to become very high profile, and is likely the most significant area of tort law bearing on the question at hand. To a lesser degree, the law applicable to professional misfeasance-especially architects and engineers—may play a role in the issues of interest. 46 The discussion begins with a brief account of the historical development of tort law, its modern goals, and its expansion over the past quarter of a century. It then proceeds to sketch out the theoretical debate over the role of tort law in regulating modern technology. In this discussion, the tensions between limiting law to advance technology and employing law to minimize risk are revealed. Next, the impact of tort law on the international competitiveness of domestic producers is considered. 45   Huber, Safety and the Second Best: The Hazards of Public Risk Management in the Courts, 85 Colum. L. Rev. 277 (1985). 46   For a discussion of the contexts in which architects and engineers may be liable for personal injuries, see Comment, A Defense Catalogue for the Design Professional, 45 UMKC L. Rev. 75 (1976). Professional liability of architects and engineers predominantly involves claims by owners or contractors when cost overruns, delays, or construction defects appear. See INA Corporation, Professional Liability Loss Control A-6 (1980). Those problems, endemic in construction, generate lawsuits that determine which of the entities involved in the construction venture should bear the associated losses. Because the parties stand in a contractual relationship, thereby facilitating allocation of the risks to the party best able to control them and willing to bear them, these suits should not have much of an effect on attempts at innovation. For a discussion of legal theories and issues raised by building component failures, see Martell and Glewwe, Building Component Failures—Sources of Salvage in ABA, Risks in Construction: New, Increased, Decreased (1986).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building Ultimately, two questions emerge: (1) what is the impact of tort doctrine on technological development, and (2) what effect does this impact have on net social welfare? The first question is empirical; the second is both empirical—in requiring information about the costs of innovation dampening—and a question of policy—in trading off economic development for safety. Recent work by The Conference Board and the Rand Institute provides some sketchy evidence that bears on the first question, but no systematic data exist on the benefits of tort regulation, especially in the matter of dangerous products, services, or techniques that were prevented from being placed on the market. The claim that American products liability law hinders domestic companies' international competitiveness is often stated but infrequently documented. Two distinct concerns are suggested. One concern is that the American consuming public pays a high price, compared to consumers worldwide, for the U.S. tort system. This claim questions the trade-off between commercial productivity and safety (i.e., the basic cost-benefit question addressed earlier). Suffice it to say that it seems rational that U.S. society, given its wealth, would value human safety higher than a Third-World country anxious to accelerate economic development. As a result, products of firms marketed in the U.S. and subject to domestic liability laws may have higher prices, reflecting the additional safety required or higher liability costs. The second concern is that domestic firms are disadvantaged by U.S. tort law in competing with foreign firms. The stringent domestic products liability system, in this view, creates an uneven playing field, in which domestic manufacturers, subject to U.S. law, must produce their products with less risk, which means added expense (to build in safety) or decreased functionality. Moreover, miscalculations are costly—manufacturers sued in the United States are subject to much higher damage awards than anywhere else in the world.47 Thus, it comes as no surprise that American companies pay a greater amount for product liability insurance than their international competitors. The U.S. 47   This disparity was recently highlighted in Dow Chemical Co. v. Alfaro, 786 S.W.2d 674 (Tex. 1990), in which Costa Rican citizens allegedly seriously injured (rendering them sterile) by chemicals produced by Shell Oil Company and Dow Chemical Company attempted to sue those corporations in Texas. An affidavit submitted by a Costa Rican judge stated that the maximum plausible recovery for the plaintiffs in Costa Rican courts was $1,080. Id. at 683 n.6. See generally McGregor, Personal Injury and Death, in XI International Encyclopedia of Comparative Law: Torts 9-169 to 9-179 (A. Tunc, ed, 1983).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building Department of Commerce found that some companies pay 20 to 50 times what their foreign competitors pay for products liability coverage. 48 On balance, precious little evidence emerges one way or the other on international competitiveness, although most of the proponents of a negative effect are long on rhetoric and short on analysis and data. Hence, this particular aspect of the debate is not treated further here. BRIEF HISTORY OF TORT LAW The tort system of several centuries ago would be quite unfamiliar to us today. Personal injury lawsuits played but a minor role in a society in which agriculture and land had dominant roles. Interactions between strangers were uncommon, and the engines that fueled industrialization (and wreaked their havoc on those unfortunates who got in the way) were yet to be developed.49 Society was no better-off health-wise, indeed it was considerably worse-off, but the causes of death, illness, and injury largely resulted from natural sources rather than human-developed technology and societal interactions. Strict liability was largely the rule applied to those harms that the courts recognized as subject to liability, but that was a considerably limited class of harms. As the number of incidents causing injury grew and the scope of injuries that the courts recognized expanded, movement toward a fault-based rule of law developed. ''[T]he modern negligence principle in tort law seems to have been an intellectual response to the increased number of accidents involving persons who had no preexisting relationship with one another—'stranger' cases."50 Some historians have postulated that the movement away from strict liability in the late nineteenth century was for the purpose of aiding the development of fledgling industry.51 48   P. McGuire, The Impact of Product Liability 4 (1988). 49   The railroad, surely one of the most important technological developments in the history of mankind, is credited with playing a major role in the development of tort law in the late nineteenth century. F. Vandall, Strict Liability: Legal and Economic Analysis 6 (1989). 50   G. White, Tort Law in America 16 (1985). 51   The most prominent advocates of the "subsidy theory" include L. Freidman, A History of American Law 409–427 (1973) and M. Horwitz, The Transformation of American Law, 1780–1860, at 85 (1977). Gary Schwartz disputes that account in Schwartz, Tort Law and the Economy in Nineteenth-Century America: A Reinterpretation, 90 Yale L.J. 1717 (1981).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building By the early twentieth century, fault—expressed as negligence—had captured the day. American courts resisted the British movement toward pockets of strict liability and required a plaintiff to prove negligence—a failure to exercise reasonable care—on the part of the defendant in order to recover damages. At the same time, some areas were identified for special treatment. In the workplace, occupational injuries were removed from the tort system. A no-fault compensation system was adopted that guaranteed all injured workers a modicum of recovery, thereby rendering fault irrelevant. Throughout the twentieth century, numerous tort decisions have expanded the scope of liability, as one prominent example illustrates: In the products liability arena, one of the most significant doctrines limited a manufacturer's obligations to those persons purchasing the product from the seller. This requirement of "privity of contract" insulated most manufacturers from suit by consumers, where intermediate distributors existed. The privity requirement was swept away in a seminal decision by Judge Cardozo in MacPherson v. Buick Motor Co., 52 in 1916, greatly expanding the potential liability of product manufacturers. With MacPherson, the framework for the development of modern products liability law began. Henceforth, manufacturers would owe a duty of due care to all who might foreseeably be harmed by the use of the product. Despite the signal revolution in liability law marked by MacPherson , the privity requirement remained in place for many nonproduct claims. Thus, architects and engineers were not liable to third parties with whom they had not contracted. Not until 1957, when the New York Court of Appeals53 analogized a building to a product and held that architects could be sued by third parties, was the privity barrier eliminated for architects and engineers. Most other states have followed suit. Tort law has grown in tandem with the industrialization of society and technological development. Industrialization and technology have improved society's well-being immeasurably, including health and life expectancy, but have at the same time transferred many risks from natural causes to human-controlled causes. Natural risks were of little interest to the tort system, but transferring risks to human control creates numerous opportunities for human fallibility, error, and harm. Kidney dialysis machines, for example, prolonged the lives of many with kidney disease, but at the same time created opportunities 52   217 N.Y. 382, 111 N.E. 1050 (1916). 53   Inman v. Binghamton Housing Authority, 3 N.Y.2d 137, 143 N.E.2d 895, 164 N.Y.S.2d 699 (1957).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building for human error in the operation of this technology that could cause significant harm.54 Thus, the shift of risks to human control has fueled significant growth in the tort system. Probably the most significant factor in the development of modern liability law is strict products liability and its theoretical enterprise liability underpinnings (see next section for definition of enterprise liability). The intellectual lineage of strict products liability is quite extensive, but one figure who stands out is a judge on the California Supreme Court, Roger Traynor, who in 1944 began a crusade for imposing strict liability on manufacturers.55 Twenty years later he persuaded a majority of his colleagues on the California Supreme Court to impose strict liability on the manufacturer of a Shopsmith, which could be used as a variety of power tools. While the purchaser's husband was using the Shopsmith as a lathe, set screws that were inadequate to hold the wood stock in place gave way and the wood flew out of the machine, hit the plaintiff in the head, and caused serious injuries. Rejecting both sales law, an area of contract law, and fault-based tort notions, which the defendant argued should govern its liability, Justice Traynor wrote: A manufacturer is strictly liable in tort when an article he places on the market, knowing that it is to be used without inspection for defects, proves to have a defect that causes injury to a human being. . . . The purpose of such liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons who are powerless to protect themselves.56 Over the remainder of the decade, the move toward strict products liability would receive widespread support and adoption in the supreme courts of most states.57 The American Law Institute, an influential organization of attorneys, 54   Grady, Why are People Negligent? Technology, Nondurable Precautions, and the Medical Malpractice Explosion, 82 Nw. U.L. Rev. 293 (1988). 55   Escola v. Coca-Cola Bottling Co., 24 Cal. 2d 453, 150 P.2d 436 (1944) (Traynor, J., concurring). 56   Greenman v. Yuba Power Products, Inc., 59 Cal. 2d 57, 27 Cal. Rptr. 697, 377 P.2d 897 (1963). 57   As with virtually all tort law, products liability is a creature of state common law. This means that each state has power to shape its own law, creating the possibility of variations and inconsistency. It also means that

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The Role of Public Agencies in Fostering New Technology and Innovation in Building judges, and academics, published a strict liability provision that influenced many state courts.58 During this period, many jurisdictions expanded the areas to which this new strict liability applied, including leased products, used products, and completed buildings.59 In parallel with these technical legal developments, there have been shifts in public as well as judicial attitudes about the acceptability of risk, control of risk, and responsibility for risk, which help explain at least some of the expansion of liability and the upward movement in tort damages over the past several decades. This movement, difficult to document comprehensively in precise terms, is exemplified by the $125 million jury verdict for punitive damages in the Ford Pinto case in 1978 in California.60 The $125 million jury award was reduced by the court to $3.8 million. PURPOSE OF THE TORT SYSTEM61 The twin goals of the tort system should be to minimize the costs of accidents and to effectuate fairness in allocating the losses due to accidents. Because the concept of fairness is elusive and variable, it might be viewed as a veto or constraint on the more analytical, and ultimately utilitarian consideration of minimizing the costs of accidents. Tort law should provide incentives to minimize the sum of the costs of accidents and the costs of accident prevention. This view—termed the enterprise theory of tort law—acknowledges that some accidents are not worth avoiding. The costs of accidents fall into three primary categories. The first category is direct costs and consists of two components: (1) the costs of preventing or avoiding those accidents for which it is cost-effective to do so; and (2) the losses suffered by victims of the remaining accidents—the loss of wages, costs of medical care, and less quantifiable costs of losing a limb or the ability to engage in desirable activities, including pain and suffering. It is important to keep in     courts, rather than legislatures, are the primary institution making this law. 58   Restatement (Second) Torts § 402A (1965). 59   See, e.g., Schipper v. Levitt & Sons, 44 N.J. 70, 207 A.2d 314 (1965) (holding home builder liable for defect in a water heater installed in home); see generally Comment, Strict Liability and the Building Industry, 33 Emory L.J. 175 (1984). 60   Grimshaw v. Ford Motor Co., 119 Cal. App. 3d 757, 174 Cal. Rptr. 348 (1981). 61   Much of this section is derived from an influential book entitled The Costs of Accident, authored by Dean Guido Calabresi of the Yale Law School.

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The Role of Public Agencies in Fostering New Technology and Innovation in Building mind that the latter component of cost is borne by society regardless of whether the victim is compensated. Direct costs do not disappear when a defendant is not required to pay for them, although they do remain more hidden and outside such contemporary measures of welfare as the Gross National Product. The second category of costs requires recognition of interpersonal comparisons of utility—a catastrophic loss to one individual is a greater loss than if it is spread among a larger group. The prevalence of insurance in contemporary society is powerful evidence of the reality of these costs, but whether government should impose this view through law by building an insurance component into strict products liability law or leave such judgments to the marketplace is a more controversial matter. Finally, a third category of the costs of accidents is the money society spends to decide whether to reallocate accident costs from the victim to someone else—friction costs of the tort and litigation system. The costs of paying lawyers and expert witnesses and maintaining a court system are as surely a cost of accidents as are the auto body repairmen's bills. The first step in effectuating the cost minimization goal is to provide incentives to take precautions against accidents for which the costs of avoidance are less than the costs of the accident. This is the "deterrent" function of tort law. Imposing liability for accidents on each activity or product that causes them should effectuate this goal by requiring the entity to internalize the costs of accidents. This internalization creates the deterrence that the tort system in theory provides. Imposing liability on the entities responsible for activities posing risks provides the financial incentives for cost-justified safety precautions. The responsible entity, then, should invest in safety until the next dollar spent will reduce accident costs by something just less than that dollar. Of course, the injured victim is one of the entities who caused the accident and upon whom the costs might be imposed to effectuate deterrence. Imposing liability on the victim, however, rarely has a significant deterrent effect—most of us drive carefully or otherwise take precaution not because we are concerned about the impact of our behavior on some future lawsuit, but because we wish to avoid the unpleasant prospect of pain, injury, or death. By contrast, producers, as artificial entities concerned with profit maximization, are far more susceptible to behavior modification through financial incentives provided by the legal system. As a result of this internalization of accident costs, the price of a product or activity will generally reflect the costs of those accidents for which avoidance is not worthwhile (i.e., is too costly). The higher price will cover that residual level of risk and accidents that cannot be reasonably avoided. For these residual accidents, the direct costs of the accident may be reduced by providing prompt compensation to the victim to mitigate the damages suffered. Thus, prompt compensation may enable an accident victim to obtain a prosthesis or

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The Role of Public Agencies in Fostering New Technology and Innovation in Building occupational rehabilitation, which will reduce the extent of disability suffered.62 Even if no direct savings can be obtained, payment to the victim serves the loss-spreading function, thereby reducing secondary costs. This compensatory aspect of tort law has been the predominant influence in tort law's modern developments. Courts have focused on finding a source, sometimes quite distant from the locus of responsibility, to provide compensation to injured plaintiffs. Yet this emphasis on compensation tends to obscure the impact on deterrence, to which it is only loosely tied, and deterrence often receives secondary consideration from the courts.63 In particular, the amount of compensation that is optimal may not be the same amount the party hold liable should pay to optimize deterrence.64 The expansion of liability over the past several decades has been supported by this enterprise theory of tort law. Although the contemporary tort system is not modeled perfectly on these economic underpinnings, design defects, by far the largest and most significant class of products liability cases, are generally determined by reference to a cost-benefit analysis of the challenged design.65 Under this scheme, manufacturers have incentives to take all cost-justified precautions, but the costs of those accidents not worth avoiding are left with the victims, rather than imposed on manufacturers. DETERRENCE: TOO MUCH OR TOO LITTLE Proponents argue that if the tort system, viewed within this economic framework, is operating optimally, societal resources are maximized. Those risks worth avoiding will be avoided by manufacturers acting in their own economic self-interest; those risks not worth ameliorating or avoiding will remain. Many contemporary commentators have argued that the tort system is not operating optimally. In particular, it is claimed that current operation of the system is 62   See statement of Leonard Bender, M.D., on behalf of the American Congress of Rehabilitation and the American Academy of Physical Medicine and Rehabilitation, in Hearings before the Subcommittee on Consumer Protection and Finance of the House Committee on Interstate and Foreign Commerce, 95th Cong., 1st Sess. 594 (1977). 63   The hegemony of compensation in modern tort law might be blunted if universal health-care coverage were available. In other Western countries with universal healthcare, such as Canada and England, compensation does not play the same influential role as it does in this country. 64   See S. Shavell, Economic Analysis of Tort Law § 10.2 (1987). 65   See M. Shapo, The Law of Products Liability 9-9 to 9-11 (1987).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building excessive in its deterrence, leading manufacturers and other producers to determine that costs of new products are too great to merit their introduction to the marketplace. Before turning to the possible reasons for overdeterrence, a note of caution is in order. Much of the literature documenting, discussing, and analyzing the 1980s tort crisis has focused on the rate of change that occurred rather than on whether those changes are making the system more or less efficient.66 Thus, statistics documenting the increase in the number of tort suits filed or the increase in the median damage award do not tell us whether the system was underperforming in the past or is overdeterring currently. Similarly, reports of the increased impact on corporate operations, rapid increases in liability insurance premiums, and other responses to expanded liability do not answer the question of whether those occurrences are steps toward or away from optimization of the system. Although rapid changes no doubt cause dislocations, and discomfort, and unsettle planning, the elusive ultimate question is not the rate of change of the system, but the direction in which it is moving. Among the plausible reasons why overdeterrence may occur is error in the judicial process. Courts may make errors in performing cost-benefit analyses, systematically favoring plaintiffs. Juries are allocated substantial power in deciding tort cases, and most observers are inclined to believe that jurors sympathize with badly injured plaintiffs. The "public risk" version of this proplaintiff bias hypothesizes that if jurors (and even scientifically untrained judges) react irrationally to high-technology, high-profile, public risks (such as nuclear power plants or toxic waste dumps), then excessive liability may be imposed on producers of what logic and scientific measurement show to be safer technology.67 66   See, e.g., Malott, Product Liability System Hampers Effectiveness, Financier, Jan. 1988, at 29 (arguing that growth of number, size, and uncertainty of products liability awards has caused increased prices, led to withdrawal of products from the market, and hampered innovation). 67   See, e.g., Counting on Science at EPA, 249 Science 616 (1990) (detailing the disparities between a recent Environmental Protection Agency ranking of the most significant health and ecological risks and the public's ranking of those concerns). Professors Clayton Gillette and James Krier make a powerful argument that simply counting fatalities as most expert risk assessors do, misses a different, yet rational world view to which the public subscribes: an aversion to involuntarily imposed (as opposed to voluntarily assumed) risk; dislike for risks involving latency periods and insidious disease as opposed to sudden traumatic injury; and intolerance for man-made as opposed to natural risks. Those preferences are not captured in standard mortality and morbidity statistics. Gillette

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The Role of Public Agencies in Fostering New Technology and Innovation in Building lawyers) recognize the futility of filing a claim in the face of an expired statute of limitations. Other possible sources of underdeterrence include agency cost problems in which corporate managers do not act in conformity with the best interests of the corporation but rather tend to favor their own personal interests. This effect may also occur most prominently for risk with long time lines. Corporate executives or officials, under pressure to perform in the short run and unlikely to still be in a responsible position decades later when the risk manifests itself may not take precautions that would otherwise be optimal for the organization and for society.74 Similarly, the limited liability of corporations could result in excessive risk taking. Low-probability, high-magnitude risks may be financially attractive for a firm that will not bear all of the costs if the risk comes to fruition,75 although this possibility is rendered less likely because of management's desire to retain its position and control of the corporation, at least for short-run risks.76 IMPACT OF THE TORT SYSTEM What do the data show about the impact of tort law on effecting an optimal level of deterrence? Does tort law affect producer behavior? If so, is there an impact on innovation? A few recent studies have investigated the effect of products liability law on corporate behavior. These studies have tended to focus on the impact of change in product liability laws, assessing the consequences of expanded liability. However, assessing responses to change does not resolve the overall question of effect, which remains open. One recurring theme that emerges from all of the studies is the industry-specific nature of the impact. What one might say about the small aircraft industry, which has been heavily affected by strict product liability, surely could not be said of the steel industry. No study focuses on or considers what might loosely be termed the construction industry. 74   See Felstiner and Seigelman, Neoclassical Difficulties: Tort Deterrence for Latent Injuries, 11 Law & Pol'y 309, 309–912 (1989); Hayes and Abernathy, Managing Our Way to Economic Decline, Harv. Bus. Rev., July–Aug. 1980, at 67; Henderson, Product Liability and the Passage of Time: The Imprisonment of Corporate Rationality, 58 N.Y.U.L. Rev. 765 (1983). 75   See Shavell, The Judgment Proof Problem, 6 Int'l Rev. L. & Econ. 45 (1986). 76   Roe, Corporate Strategic Reaction to Mass Tort, 72 Va. L. Rev. (1986).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building An early 1980s study performed by the Rand Institute for Civil Justice investigated how firms had responded to the development of strict product liability. Interviews were conducted with corporate product safety officers of nine large consumer products corporations that are considered leaders in the safety field. The study revealed that among several forces that have combined to focus attention on product safety, ''product liability is the most significant influence on product safety efforts." The authors distinguished industries based on how heavily regulated they were, concluding that in industries subject to less governmental safety regulation, "products liability probably exerts the overwhelming pressure" influencing design decisions. 77 Only in industries subject to heavy regulation (the airline and pharmaceutical industries, for example) does regulation outweigh products liability law regarding safety-related decisions. However, the question of disincentives to innovation was not considered. Two studies conducted by the Conference Board, a nonprofit corporation that provides information to business executives, did consider the impact of liability laws on technological innovation. The first study, 78 conducted in the midst of the 1980s torts crisis focused on: what, in fact, has been the impact of the liability and/or insurance crisis on the nation's major corporations and, by extension, on the economy? . . . How in fact has the corporate world reacted to both current insurance prices and to lawsuits filed by aggrieved consumers? The author surveyed 232 risk managers in major domestic manufacturing, trade, and service corporations. The study was limited to large corporations; only those with a minimum of $100 million annual sales were included. The most surprising conclusion of the study was the insignificance of liability on corporate operations: The most striking finding is that the impact of the liability issue seems far more related to rhetoric than to reality. Given all the media coverage and heated accusations, the so-called twin crises in product liability and insurance availability have left a relatively minor dent on the economics and organization of individual large firms, or on big business as a whole. In the words of one manager: "There may be less here than meets the eye." 77   G. Eads and P. Reuter, Designing Safer Products 122 (1983). 78   N. Weber, Product Liability: The Corporate Response II (1987).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building Where product liability has had a notable impact—where it has most significantly affected management decision making—has been in the quality of the products themselves. Managers say products have become safer, manufacturing procedures have been improved and labels and use instructions have become more explicit. The study found substantial differential impact of liability on different industries. Two-thirds of respondents reported that the cost of liability insurance (which includes only a portion of liability costs) contributed no more than 1 percent of the price of their goods. Another 11 percent reported that final prices increased by 2–3 percent. However, in certain high-risk industries—sporting goods, for example—25 percent of the price of some products was attributable to liability costs. The impact on innovation was addressed by asking respondents whether they had declined to market a new product or service: 13 percent of the responding firms indicated that they had made such a decision in response to liability concerns, providing some solid evidence that products liability does affect the level of innovation, although apparently only in a small percentage of large firms. The Conference Board undertook a second study of the impact of products liability by surveying the chief executive officers (CEOs) of 2,000 large manufacturing firms as well as CEOs of 2,000 manufacturers having fewer than 500 employees. The response rate to each survey was less than 15 percent, which raises concerns about selection bias. In general, the second Conference Board study found greater concern with the product liability system, a higher degree of impact on corporate operations, and primary concern about the uncertainty of ex post liability determinations with the attendant unpredictability in the amount of damages awarded by juries. A much smaller, but methodologically similar, study of Pennsylvania corporations yielded data very similar to the second Conference Board study.79 In general, the firms surveyed in the Pennsylvania study were smaller firms than in the Conference Board studies; more than 80 percent of respondents had sales of less than $50 million. Most significantly, the second Conference Board study found a far more profound impact on innovation. Of the large firms surveyed, 24 percent of the CEOs reported that their firms had decided against introducing new products, more 79   Linneman and Ingberman, Product Liability law: The Economic Impact on Pennsylvania 6 (unpublished paper).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building than twice the rate found in the earlier study.80 Similarly, 23 percent of the respondents from small firms had made the same decision.81 Also, 16 percent of the large firms reported that they had discontinued product research, whereas 13 percent of the small firms had done so. Of considerable concern among companies in the durable goods industry was the liability "overhang" for products that had been produced years or decades ago when liability standards were not as strict. Manufacturers are subject to contemporary standards when a product manufactured years ago fails and causes harm. This creates a competitive advantage for new entrants into the field, who are not saddled with this liability overhang. The survey of CEOs also found a greater impact on costs than the first Conference Board study: 38 percent reported a "major" impact of products liability on direct costs, which was not explicitly defined, but appears to be in the 10–15 percent of total costs range and higher. 82 Only 18 percent of respondents reported a 2 percent or less increase in direct costs. While the "direct cost" category in the second Conference Board study was broader than the liability insurance costs studies in the first survey (direct costs included litigation costs and payments made under deductibles), the different definitions are unlikely to account fully for the disparities. The second survey did confirm the earlier finding of disparate impact depending on the industry involved.83 A study conducted by the American Textile Machinery Manufacturers' Association84 found that 12 percent of surveyed machinery manufacturers 80   The 24 percent figure is based on a reanalysis of the data reported, which was broken into two different groups based on whether the reporting firm had actual liability experience or was acting on anticipated liability concerns. The author of the study erroneously added the percentage reported by each of the groups when giving the composite figure. 81   Of the respondents in the Pennsylvania survey, 25 percent reported deciding against new products. However, only 2 percent of the Pennsylvania corporations reported discontinued research. 82   A similar figure, 34 percent, emerged from the survey of smaller manufacturing firms located in Pennsylvania. 83   The differential impact was also found in the survey of Pennsylvania corporations: "We found that certain types of firms are much more strongly impacted by product liability concerns than others." Linneman and Ingberman, Product Liability Law: The Economic Impact on Pennsylvania 6 (unpublished paper). 84   American Textile Machinery Manufacturers' Association, International Study of Product Liability Costs and System for Five Domestic Machinery Industries (1984).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building reported having decided against the development of a new product line. The reported lower figure by machinery manufacturers (compared to the other studies) may be a consequence of the susceptibility of machinery to be designed for additional safety by providing more safeguards. By contrast, chemicals, drugs, and insulation materials often cannot be made safer and must be marketed as formulated or withheld from the market. From these studies, it seems fair to conclude that the expansion of liability has had a measurable and not insignificant effect on innovation. The extent of that effect is difficult to measure precisely, and likely varies across industries. High-technology industries, in which mechanisms of risk are less well understood and products cannot be altered incrementally to improve their safety, are subject to a greater impact than other industries.85 Recognizing a measurable impact, however, does not answer the question of whether that effect is socially undesirable. The missing pieces are the safety gained by the suppressed innovation and the marginal benefit of the suppressed innovation over existing technology. If the products withheld were the next generation of thalidomide, society has plainly benefited from the deterrent effect identified. If, on the other hand, producers are erring in their assessments of the risks posed by overestimating the risks, or because of uncertainty are acting in a risk-averse fashion in deciding whether to develop and market new technology, or even responding accurately to a systemic bias in favor of injured plaintiffs, then social welfare is diminished. Unfortunately no data exist to assess the costs and benefits of withheld products or lost technology. A Rand Institute study of the effect of products liability on design decisions concluded: "Data do not exist to permit judgment of the reasonableness of the current system. It is not possible to measure the improvement, if any, in the level of safety of consumer goods that has resulted from changes in regulation and law."86 However, there can be little doubt that significant safety benefits have been realized from the liability system. The first Conference Board study emphasized that effect, and a recent Rand Institute study observed the following: One of the clear implications of the information we have collected, however, is that firms have changed their behaviors in some ways that are consonant with the goals of those who advocate expanded liabili- 85   See, e.g., Broad, Does the Fear of Litigation Dampen the Drive to Innovate, N.Y. Times, May 12, 1987, § C, at 1, col. 1 (reporting on decision to forgo development of a powerful particle accelerator to irradiate food because of unknown risks that might exist in the process). 86   G. Eads and P. Reuter, Designing Safer Products (1983).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building ty. . . . [T]he growth of product liability awards and of strict liability has increased the sensitivity of many corporations to product safety.87 TORT SYSTEM TRANSACTION COSTS One aspect of costs for which good data do exist is the transaction costs of the tort system. If the amount actually received by injured claimants is said to represent the costs of accidents for which avoidance is not worthwhile, transaction costs represent the costs of administering those transfer payments. These transaction costs are to some extent inevitable, but different administrative systems result in different costs. For example, a major benefit of no-fault insurance is that it eliminates the costs of determining whether an individual was negligent, thereby reducing the proportion of transaction costs. The most recent data on the total costs of the tort system, broken down into accident and transaction components, are set forth in Table F-1. As Table F-1 shows, net compensation to injured victims is only 46 or 47 percent of the total tort system costs. Put another way, this means that of every dollar paid by defendants for insurance, self-insurance, and opportunity costs for efforts involving litigation, only 46 cents is received by injured persons. The 46 cents per dollar figure is an average—the efficiency of the tort system varies depending on the type of accident—and when automobile-related claims (which have become quite routinized) are excluded, the net compensation received by plaintiffs drops to 43 cents per dollar. A Rand Institute study of costs in asbestos litigation found that plaintiffs received 37 cents of every dollar expended.88 GOVERNMENT CONTRACTOR DEFENSE89 Proponents of the view that the tort system excessively deters innovation suggest that government's limited immunity from tort suits offers an important opportunity. Government should undertake, so the argument goes, to be the innovator, providing a sheltering umbrella to protect in the process from tort liability that may hinder innovation. 87   P. Reuter, The Economic Consequence of Corporate Liability: An Exploratory Study 3 (1988). 88   J. Kakalik, P. Ebener, W. Felstiner and M. Shanley, Costs of Asbestos Litigation (1983). 89   Much of this section is adapted from Green and Matasar, The Supreme Court and the Products Liability Crisis: Lessons from Boyle's Government Contractor Defense, 63 S. Cal. L. Rev. 639 (1990).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building TABLE F-1 Tort Systems Costs—State and Federal Courts, 1985.   Dollar Value (billions) Percentage of Total Public expense (court system) .5 1–2 Plaintiffs' legal fees and expenses 6.3–7.6 21–22 Plaintiffs' time and related expense 0.7–1.1 2–4 Total plaintiffs' expense 7.0–8.7 24 Defendants' legal fees 4.7–5.7 16 Insurance company costs 0.8 2–3 Defendants' time and related expenses 2.5–3.5 9–10 Total defendants' expenses 8.0–10.0 27–28 Compensation received by plaintiffs 13.7–16.4 46–47 Total costs 29.2–35.6   The argument gains weight and currency from the 1988 Supreme Court decision in Boyle v. United Technologies Corp.90 On April 27, 1983, David Boyle, a military helicopter copilot, died in a crash of a helicopter manufactured by the Sikorsky Division of the United Technologies Corporation. Although Boyle survived the crash impact, he drowned when he could not escape from the helicopter before it sank in the ocean. Boyle's estate brought suit against United Technologies, alleging that Sikorsky had defectively designed the copilot's emergency escape system: the escape hatch opened out instead of in, and thus was ineffective when submerged, and access to the escape hatch handle was obstructed. The jury returned a substantial verdict in favor of Boyle's estate, which was overturned by the United States Court of Appeals for the Fourth Circuit. Before Boyle a number of lower federal courts had created a "military contractor defense" that relieved suppliers of goods to the military from liability under state tort laws. These decisions employed federal law to "preempt" the application of state law, in effect providing immunity for government contractors where the defense applied. Those courts and the Fourth Circuit relied in large 90   108 S. Ct. 2510 (1988).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building measure on the doctrine established in Feres v. United States,91 which immunizes the government from liability to members of the military for injuries received in the course of their military employment. Although the Feres doctrine was inapplicable to the Boyle case because the plaintiff sued a private contractor rather than the federal government, the Fourth Circuit nevertheless found that the policies underlying Feres were also applicable in a suit against a contractor supplying goods to the military. The United States Supreme Court affirmed the decision, but on different grounds. The Court rejected reliance on Feres, instead invoking another exception to government liability known as the discretionary function exception.92 The essential purpose of the discretionary function exception is to foster uninhibited political, economic, or social policymaking in the executive or legislative branch by insulating those decisions from judicial review. Although, as with Feres, the discretionary function exception provides immunity only for the federal government, the Supreme Court believed that its concerns were also implicated when a military contractor was sued: We think that the selection of the appropriate design for military equipment to be used by our Armed Forces is assuredly a discretionary function. . . . It often involves not merely engineering analysis but judgment as to the balancing of many technical, military, and even social considerations, including specifically the trade-off between greater safety and greater combat effectiveness. . . . [W]e are . . . of the view that permitting "second guessing" of these judgments . . . through state tort suits against contractors would produce the . . . effect sought to be avoided. . . ,93 The Court then announced the elements of its new defense: Liability for design defects in military equipment cannot be imposed, pursuant to state law, when (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those 91   340 U.S. 135 (1950). 92   The discretionary function exception is contained in the Federal Tort Claims Act, 28 U.S.C. § 2671 et seq. (1982), which generally makes the federal government liable for its torts, subject to a number of exceptions. The discretionary function exception, § 2680(a), excepts from liability "any claim . . . based upon the exercise or performance or the failure to exercise or perform a discretionary function or duty on the part of a federal agency or an employee of the Government, whether or not the discretion involved be abused." 93   108 S.Ct. at 2117–2118.

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The Role of Public Agencies in Fostering New Technology and Innovation in Building specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.94 The potential application of the government contractor defense created in Boyle to federal construction projects is quite evident. Moreover, Boyle may provide a significant safe harbor for trying out innovations that would otherwise not be employed because of liability concerns, if such exist. The safe harbor would extend to suits by third parties who might suffer injury but would not encompass losses due to flaws in the building, causing loss to the government. The latter losses could be allocated however the government and its contractor decide in the construction contract. However, it is not clearly established that the Boyle decision may be applied more broadly than military procurement, and two post-Boyle decisions reached the conclusion that Boyle is so limited. In Nielsen v. George Diamond Vogel Paint Co.,95 a civilian painter employed by the U.S. Army Corps of Engineers to paint a dam sued the manufacturer of the paint he used, claiming that inadequate warnings supplied with the paint led to his suffering personal injuries. The court concluded that despite the Boyle Court's switch from Feres to the discretionary function exception as the basis for the government contractor defense, "the policy behind the defense remains rooted in considerations peculiar to the military."96 Accordingly, the court held that government contractor immunity was unavailable to the manufacturer of the paint, which was produced for use in a civilian, as opposed to a military, project. An earlier decision by a federal district court judge in Hawaii had similarly concluded: The federal interest in Boyle was the procurement of military equipment to be used by the armed forces. It is clear the Boyle opinion applies only to military equipment. Asbestos insulation products are not military equipment. The procurement of supplies by the United States is not enough to immunize the manufacturer under Boyle."97 Despite these cases, the Boyle opinion and its reliance on the discretionary function exception may have broader application. The discretionary function exception is applicable to all aspects of governmental activity and has been 94   Boyle v. United Technologies Corp., 108 S.Ct. 2510, 2518 (1988). 95   892 F.2d 1450 (9th Cir. 1990). 96   Id. at 1455. 97   In re Hawaii Federal Asbestos Cases, 715 F. Supp. 298, 300 (D. Hawaii 1988).

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The Role of Public Agencies in Fostering New Technology and Innovation in Building regularly applied in the civilian sector. Nowhere in the Boyle opinion does the Court explain why military procurement is different from civilian procurement with respect to the exercise of policymaking judgment. Nothing in the Court's opinion suggests why the discretionary function rationale would be categorically inapplicable to civilian procurement.98 Indeed, some decisions relating to military procurement may not be sufficiently policy-related to justify protection of the contractor with immunity.99 The inquiry in all cases should be whether the decision was based on trade-offs that require a policy judgment, regardless of whether this is made in a civilian or military context. Recently a federal court adopted this reasoning and concluded that the government contractor defense is applicable to civilian procurement. In re Chateaugay Corporation, CCH Prod. Liab. Rep. ¶ 13,042 (U.S. Bankr. Ct. S.D.N.Y. Oct. 1991). Another open question after Boyle is whether the contractor defense extends to defects other than those of design. Thus, if, as in Nielsen , the plaintiff alleges that inadequate warnings were supplied, would the claim be barred by the Boyle decision? The Boyle opinion carefully limits its language to design defects, but once again the Court's reliance on the discretionary function exception as the conceptual foundation for its decision suggests a broader exception. The key is not the type of defect, but the extent to which the government confronted safety, functionality, and innovation concerns, and approved proceeding in a fashion thought to maximize public policy. Hence, a decision by a branch of the armed services that fostering innovation in construction is a matter of substantial importance, such that it adopts recent construction innovations and mandates that they be employed, seems likely to fall squarely within the Boyle contractor defense. To be sure, the governmental officials in charge of the project should document their exercise of discretion to employ new technology, and the contractor should be forthcoming in sharing its knowledge about the risks and benefits of the innovation to be employed. Information about alternatives that might be pursued within the umbrella of the innovation should also be shared. However, if these conditions are met, immunity should follow. Similar confidence cannot be expressed about the availability of immunity where the government agency is a 98   The Court did state that the selection of appropriate designs for military equipment falls within the ambit of the discretionary function exception. Regardless of the truth of that proposition, it does not explain why the selection of designs for other equipment purchased by the government would not also fall within the discretionary function exception. 99   Thus, a mindless rubber stamping by the government of detailed plans prepared by the contractor would no more fulfill the mandate of the discretionary function exception than would delegating complete design authority to the supplier.

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The Role of Public Agencies in Fostering New Technology and Innovation in Building civilian one. The reasoning of the Supreme Court in Boyle would support immunity, but to date the post-Boyle lower courts have reached conflicting decisions on this issue.