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Product Liability and Innovation: Managing Risk in an Uncertain Environment Overview and Perspectives TREVOR O. JONES and JANET R. HUNZIKER An engineer in the general aviation industry notes that in some cases 20 percent of engineering staff time is spent producing documents for various forms of legal discovery and preparing information for defense against product liability suits. Engineers in the automotive industry, knowing that a design change can be misconstrued in a product liability suit to mean that the former design was deficient, feel constrained about discussing and implementing design changes, including safety improvements. A manufacturer of life-saving implantable medical devices hears from some of its suppliers who are major producers of critical raw materials that they will restrict supply of their materials to that industry. The reason they give is that the risk of being pulled into product liability suits is too great. The company must fill the gap with materials from smaller, less technologically well-established companies. As public policy debates go, the one involving the impacts of the U.S. product liability system on the ability of American companies to innovate and remain competitive may be perceived by most of the public as somewhat distanced from the normal activities of everyday life. Unlike the economy or health care, product liability is not an issue covered daily by the news media. Most Americans' knowledge of product liability comes from hearing or reading about particular cases or judgments that
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Product Liability and Innovation: Managing Risk in an Uncertain Environment are deemed newsworthy because of the names of the corporate defendants, the circumstances of the case, or the size of the awards. Although tort reform is a recurring theme in federal and state legislation, most non-lawyers would be hard pressed to define what a ''tort" is, let alone the reforms that are being recommended. Yet, because the product liability system deals with the consequences of personal injury and suffering caused by the use of familiar, everyday products, it is a body of law that touches on universal experiences of human existence. Thus, people know in general terms why product liability law exists, namely, that it is intended to deter the manufacture and distribution of defective products, and when that fails, to compensate those who are injured by such products. ROOTS OF THE DEBATE Since the mid-1980s, however, there has been an increasing amount of debate in public policy circles about the effect of particular trends in product liability law. Even though product safety may have been improving, companies were experiencing more product liability cases and the size of the awards was increasing. As a result, their insurance costs were going up, and for some products, insurance coverage was being withdrawn altogether. More corporate resources were being expended on matters related to product liability, particularly in certain product areas. These trends were not limited to product liability, but extended to other types of personal injury cases, including medical malpractice, toxic substances, and accidents at public facilities (Committee for Economic Development, 1989). There followed a flurry of studies that sought to determine whether these impacts were measurable and could be documented. The studies included the following findings: There had been a fivefold increase in the number of product liability cases between 1975 and 1985, excluding asbestos-related claims (U.S. Department of Justice, 1987). The greatest growth has been in the area of mass torts where hundreds and even thousands of people claim to be injured by a single product (Committee for Economic Development, 1989; Hensler et al., 1987).1 Although awards differ greatly depending on the case, personal injury awards had risen dramatically, particularly in the highest-paying cases. A study of two jurisdictions showed increases of 200 percent and 1,000 percent in the size of awards in constant dollars for product liability cases between 1960–1964 and 1980–1984 (Committee for Economic Development, 1989; Peterson, 1987). Insurance costs had risen dramatically in a period of a few years, in
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Product Liability and Innovation: Managing Risk in an Uncertain Environment some cases several hundred percent, for groups ranging from manufacturers of particular products to municipal governments (Committee for Economic Development, 1989; U.S. Department of Justice, 1986). This was in large part a response to the increase in the number of claims and the size of awards. Moreover, because premiums had failed to keep pace with losses through 1984, large increases over the next several years were needed to catch up (Harrington and Litan, 1988). CONFLICTING EVIDENCE Yet, for each contention that liability cases were indeed on the rise, and that the subsequent increase in litigation and litigation-prevention costs was throttling companies' ability to prosper, other data were cited to show that talk of a liability explosion and an overly burdensome tort system was unfounded. William Ide raises these points (in this volume), citing the low percentage that tort cases, and even more so, product liability, make up of the total state court caseload. On the specific issue of product liability impacts on innovation and competitiveness, he notes that the 1987 Conference Board survey of risk managers found product liability issues hardly affected larger economic issues, such as revenues, market share, or employee retention. What becomes clear when listening to the arguments about this issue is that viewpoints and interpretations of data are dichotomized, with mythology on both sides, and getting an objective picture is extremely difficult. On the one hand, there is much talk of a litigation "crisis" in this country. Yet, on the other hand, studies show that one person in 10 who become accidentally injured turns to the tort system for compensation (Hensler et al., 1991) and that juries are becoming more pro-defendant in trial verdicts in personal injury cases (Reubi and Foster, 1994). Although a 1987 Conference Board survey of risk managers found product liability had a relatively insignificant impact on U.S. businesses, a 1988 Conference Board survey (McGuire, 1988) of 500 chief executive officers reached the opposite conclusion. Proponents of the current system say that because the product liability system adds on average less than 1 percent to the retail price of products, it cannot be the cause of America's competitiveness problems.2 That may see like a small amount, but the percentage varies from industry to industry, and the total is still billions of dollars. This leads one to ask, What is the consumer getting from that surcharge, and where is that money going? While it is true that most states have laws that limit liability to what was known (state of the art) at the time the product was put into circulation, the practical reality of trial tactics today is that design changes come before juries all the time. Clearly, proponents of either side in this issue can find ample support for their arguments.
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Product Liability and Innovation: Managing Risk in an Uncertain Environment THE ENGINEERING PERSPECTIVE The objective for this book, and the symposium that preceded it, was not to assess all the evidence about the direct and indirect effects of the U.S. product liability system. That is indeed a difficult issue to resolve. Parties at interest include numerous stakeholders—consumers, the legal community, engineers, insurers, corporate decision makers—involved in a debate over a range of products, which are used either out of desire or out of necessity and for whatever reasons are "targets" of product liability suits. Moreover, the diversity of stakeholders is compounded by the diversity of attitudes about risk and responsibility. Rather, the goal was to get the engineering community's perspective on the effects of product liability on innovation. Why should we care about the experience of engineers? Because, as Richard Morrow points out, they are the practitioners of innovation. It is the engineers who think through the hundreds of details that result in the products we use everyday. What will the product do? What design will best accomplish that purpose? What materials will it be made of? How will different materials affect performance characteristics? How will the product be manufactured and packaged? If any group knows whether and how innovation is being affected by the product liability environment, it should be the engineers. Moreover, it is difficult to talk about the engineering function in this context without also talking about (1) how broader corporate practice is affected by product liability, and (2) issues such as insurance, regulation, risk, and the presentation and interpretation of scientific and technical information in the courtroom. Indeed, the engineering function does not exist in isolation from the rest of an institution or society. Unlike the scientist, who often pursues research that may or may not have some eventual application, the engineer is motivated by the desire to produce a particular kind of product to fill a particular need. If regulations concerning that product change, it most likely will have an impact on research directions and product design and development. If obtaining insurance for a product becomes problematic, either because it is considered too risky for traditional insurance mechanisms or because self-insurance is not an option, that risk will have to be controlled somehow. This can be done through design changes or by eliminating the product completely. These messages come back to the engineer eventually, and affect how he or she does his or her job. The unique value of this volume may be that it provides information on how some companies are responding to the risk they see presented by the product liability environment, highlighting the fact that there are costs, albeit varying, for the protection provided by our product liability system. These costs are manifested in various ways—in decisions made about
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Product Liability and Innovation: Managing Risk in an Uncertain Environment where research dollars are allocated; in how engineers spend their time; in how products are manufactured, tested, marketed, and serviced; in choices about business opportunities; and eventually in the characteristics and availability of products for consumers. THE PRODUCT LIABILITY-INNOVATION DYNAMIC Three of the authors in this volume provide a background for the issue of product liability impacts on innovation: Richard Morrow, Victor Schwartz, and William Ide. Morrow describes why the intersection of product liability and innovation is so problematic, noting that we tend to take innovation for granted in the products we use, without understanding what it is. Innovation can be revolutionary or evolutionary, but in either case it implies improvement. It also implies risk, trade-offs, and making judgments about problems that could arise from product design changes. Engineers accept this because they know zero risk cannot be achieved. (On the issue of achieving zero risk, see also Breyer, 1993.) This ambiguity can be difficult for the law to handle, particularly when technical documentation of these trade-offs is interpreted by nonengineers or when nontechnical judges and juries are asked to pass judgment on highly technical decisions. The law, Morrow writes, tells engineers to make safe products, but it does not tell them how to be safe, or how safe to be. Morrow concludes that because each side sees so much at stake—the future of companies and classes of products, even American competitiveness, on the one hand, and individual safety and well-being on the other—resolution will not be easy. The debate causes us to reflect on what it means to live in America's litigious society in the late twentieth century, where technologically complex products precipitate battles over the issues of (1) corporate and personal responsibility and risk and (2) corporate and individual financial incentives. Expansion of the System Creates Uncertainty The roots of much of the current controversy over product liability can be traced to changes since the 1960s in the interpretation of the law or in the law itself that have expanded the product liability system. The shift from fault-based standards to strict liability has meant that manufacturers can be held liable even if a plaintiff does not prove negligence (see Schwartz in this volume). Products can be found defective even when they meet regulatory standards or conform to the state of knowledge at the time the product was produced. Expansion of the doctrine of joint and several liability allows plaintiffs to collect the full award amount from one defendant if the others cannot pay. Even the concept of contributory negligence
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Product Liability and Innovation: Managing Risk in an Uncertain Environment has been relaxed, so that negligent plaintiffs can still recover damages. Rules concerning causation and statutes of limitation, particularly in long-latent injuries, have also been relaxed (Litan and Winston, 1988). The cumulative effect of these changes is that it has become easier, in some cases, to bring product liability lawsuits against manufacturers. That is not to say that it has become easier for plaintiffs to win those cases, or that there are still not serious inhibitors that prevent most people from bringing such cases in the first place. Nevertheless, making it easier to bring lawsuits has meant that a manufacturer, whether in the right or not, has had to spend more of its resources, including those that would have been devoted to innovation, in defending itself, even if a case is settled.3 As product liability rules were changing in the 1970s and early-to mid-1980s, it also became more difficult for a company to know what to do to prevent involvement in such suits. Victor Schwartz notes at the beginning of his paper that a certain amount of stability has returned to product liability law, making product liability risk more manageable. In his description of the four ways a product can be found defective—manufacturing defects, innocent misrepresentation or express warranty, failure to warn, and design defects—he also notes what a manufacturer must do to avoid being found liable in any of those ways. Cases involving design defects or failure to warn, he writes, continue to be problematic. The perceived unpredictability in the product liability system has prompted calls for reform at both the state and the federal level. The vast majority of tort cases are handled at the state level, 95 percent according to some sources (Hensler et al., 1987). States, however, have different product liability standards, and because product liability cases often involve litigants from different states, this can cause great uncertainty for manufacturers involved in interstate commerce. For years there have been attempts to develop some baseline federal standards for product liability law, but without success. Schwartz points out that a number of states have enacted their own reforms concerning punitive damages and design cases, but that to be truly effective, some fundamental issues such as joint and several liability, punitive damages, and the handling of claims must be dealt with at the federal level. (For a treatment of product liability reform issues, see Babcock, Appendix, in this volume.) A frequently cited argument in support of federal tort reform is that foreign competitors have an edge because they do not have to deal with an unwieldy product liability system. Schwartz notes that foreign competitors have to follow the same rules as U.S. manufacturers when they sell products in this country. However, even if a foreign firm is subject to a U.S. court's jurisdiction, conducting depositions and collecting damages is much more difficult. Moreover, early penetration by U.S. companies of
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Product Liability and Innovation: Managing Risk in an Uncertain Environment particular industries means they often have far more older products circulating in the marketplace than their foreign competitors. Because they are still liable for injury caused by those products, they have higher product liability costs, which are passed along to the consumer in higher product prices, making them less competitive on a price basis (Cortese and Blaner, 1989; Sontag, in this volume). U.S. product liability law also differs in many ways from that of its major competitors. As Schwartz points out, these differences can be seen in measures related to the implementation of the European Community (EC) Directive as well as other aspects of the legal system. In Europe and Japan, for example, judges rather than juries decide cases, punitive damages are not awarded, and there are no contingent fees. More important, there are differences in the culture and the social attitudes toward risk, responsibility, and litigation as an avenue to redress wrongs. These cultural differences have created far different legal systems for dealing with product liability cases. Another Perspective The final background paper, that by William Ide, is strongly supportive of the American justice system, while noting the peculiar challenges of product liability law. His views represent another side of the debate and contradict the views of others in this volume. He notes that compelling reasons for having the current system are the number of accidents and deaths that occur when using a consumer product (although the product may not be the cause), the lack of a government-funded social safety net for accidental injuries, and the high cost of health care. Ide also discusses common misperceptions about the product liability system concerning numbers of cases, amounts of damages, and impact on U.S. innovation and competitiveness. Ide does not contend that the current product liability system is perfect or that it should remain unchanged. He notes that legislatures and courts have been slow to respond to a number of challenges, including those brought on by advances in science and technology. As a result, the American Bar Association (ABA) has recommended changes that deal with issues such as uniformity of awards, punitive damages, and joint and several liability, and is working with other groups to develop a consensus on what improvements should be made and how they can be implemented. Although many on the pro-reform side would criticize Ide's paper, it is important to understand the view he puts forth. It illustrates again that there are enough data and different interpretations of information (note in particular Schwartz and Ide's different views of the EC Directive) to support
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Product Liability and Innovation: Managing Risk in an Uncertain Environment either side. His optimistic view of where the U.S. product liability system is headed is at odds with that of contributors from the chemical, medical device, and general aviation industries. In this, Ide differs with those who feel beleaguered by a product liability system that, in the hands of contingency fee-based lawyers and at times nontechnical judges and juries, seems neither wise nor reasonable. IMPACT ON ENGINEERING PRACTICES, INNOVATION, AND CORPORATE STRATEGIES Not all industries have been affected to the same degree by trends in product liability law. Authors in this volume look at five industries perceived as being heavily affected by product liability—chemical, general aviation, automotive, pharmaceutical, and commercial aviation. With the exception of general aviation, almost all Americans use products from these industries throughout their lives, and they are all industries where technological innovation is a critical component of business success and the continuing improvement of our quality of life. The writers of papers in this section are well qualified to comment on the impact of product liability on engineering practice and innovation, and the strategies companies employ to minimize the risk of product liability. They include engineers whose job it is to oversee research and development, and other high-level executives whose positions give them a broad view of how product liability is affecting their organizations. Although their comments are anecdotal, they indicate how product liability has affected different industries. Even among these five industries, product liability has had varied impacts. It is blamed for the near decimation of an entire industry; it is considered the main determinant of what product lines a company pursues, thereby affecting supplies of materials for other critical industries; it is viewed as an expensive nuisance that diverts corporate resources but does not seriously restrict innovation. Materials Suppliers As described by Alexander MacLachlan, product liability has had a major impact on where R&D dollars are invested and which lines of business are pursued by DuPont, a highly diversified company in an industry that supplies a wide variety of important materials to other industries. He notes that because of the inherent dangers in manufacturing and handling chemicals, risk management and product stewardship are simply good business practices. Nevertheless, the risk of product liability litigation over products containing even a few cents' worth of DuPont materials has caused the company to rethink certain lines of business. The most dramatic
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Product Liability and Innovation: Managing Risk in an Uncertain Environment example of this, and one that could potentially affect thousands of lives, concerns the provision of materials used in medical applications. Because of the high product liability risk, DuPont will stop supplying necessary materials to medical device manufacturers unless DuPont is involved in the design of the article and controls how the material is applied. An offshoot of this decision is that there will be little if any future investment by the company in research on synthetic material for internal-use medical devices. Representing a company on the receiving end of this policy, Paul Citron is sympathetic to the dilemma faced by materials suppliers like DuPont. Because of their perceived deep pockets, these large companies become targets of lawsuits, even when they have no involvement in the specification, design, testing, or manufacture of the end product. He notes that defending against such lawsuits can cost millions of dollars on only dollars' worth of materials sales. With mature, technologically well-established firms being driven out of the materials supply business, the medical device industry has had to turn to smaller, less sophisticated materials manufacturers. Innovation in both the materials and the devices themselves has been slowed because it is in the exiting companies that breakthroughs would most likely have occurred, and the device manufacturers have had to divert resources to find new suppliers instead of advancing the state of the art. General Aviation If MacLachlan and Citron paint a bleak picture of how the product liability environment is affecting companies in the materials and medical device industries, the picture from the segment of the general aviation industry that produces piston engine-driven planes is even bleaker. Among the five industries represented in this volume, general aviation has been most affected by the product liability environment. This may be understandable considering the following circumstances: operators are not always proficient in handling the complex machines they fly, particularly in adverse weather conditions; aircraft maintenance may not always be thorough enough; and there are on average five, sometimes spectacular, accidents a day involving general aviation aircraft. The cost of defending against lawsuits, more than the cost of judgments, has had serious consequences. The light single-and twin-piston engine segment of general aviation is a beleaguered industry that of necessity innovates less and manufactures fewer new planes, creating a cycle in which there are more older aircraft and thus more accidents and product liability lawsuits. Bruce Peterman's paper focuses on the engineering changes that product liability has brought about in the general aviation industry, noting that
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Product Liability and Innovation: Managing Risk in an Uncertain Environment a few of these changes have been positive. Nevertheless, his description of the effects on various engineering functions, including allocation of resources, design, and documentation, reveals an industry in which engineers and technical personnel must consistently be in a defensive mode. Peterman implies that this diversion of the engineer's time to handling product liability-related concerns, whether it be direct involvement in a lawsuit or the overdesign of a product as a defensive measure, and the reluctance to include new technology in the product are a drain on engineering resources and are not conducive to innovation. Frederick Sontag, as president of a company that supplies parts to the general aviation industry, provides a broader look at the indirect effects of product liability on a corporation in this industry. Among the papers in this volume, Sontag's gives the most comprehensive look at how product liability can make itself felt broadly in a company—from product strategies through relationships with other firms to financing. General aviation is arguably an industry in which the worst-case scenario of product liability impacts has occurred. Nevertheless, it is instructive to look at the unintended effects of a set of laws that were enacted to deter the manufacture of unsafe products and compensate victims of those products: restricted consumer choice in products and services, narrowed financing options, diversion of personnel and financial resources from productive activities, and higher product prices. Automotive Industry The impacts of the product liability system on the automotive industry, and the way that industry deals with product liability, are described in the papers by François Castaing and Charles Babcock. Castaing focuses on how product liability has affected engineering practice. He notes that the threat of lawsuits has had the unintended effect of (1) inhibiting the incentive to innovate, particularly safety features, (2) discouraging the critical evaluation of existing features, and (3) preventing the rapid implementation of improved design changes. He attributes these effects to trial tactics that misconstrue product improvements and design changes, particularly revolutionary ones, to mean that something about the former features was defective. He also examines the argument that if indeed product liability is responsible for safer cars, the United States should have the safest cars on the road; he notes that the Europeans and Japanese, which experience few product liability lawsuits, are known for their innovative and safe vehicles. Consumer advocates may argue that the compulsion of law is required to motivate U.S. automakers (with their purported short-term perspective) to do what European and Japanese car manufacturers do without such coercion.
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Product Liability and Innovation: Managing Risk in an Uncertain Environment Charles Babcock dispels this view in his paper that explores a range of issues—from the roots of popular assumptions about automakers and how highway safety could be improved through that industry's experience with product liability to the role of engineers in the debate. He asserts that product liability cases are nothing less than claims of engineering malpractice and that the U.S. legal system does not provide consistent messages about its rules for product safety and design to the audience that needs to hear them, namely, engineers. In dealing with engineers puzzled by how to respond to a product liability system that is perceived as capricious and unpredictable, Babcock suggests that the best advice to the engineer is simply to ask questions, innovate, and write accurate documents. On the question whether product liability discourages innovation in the automotive industry, Babcock cites evidence on both sides of the issue. What then, he asks, is at the root of dissatisfaction with the U.S. product liability system? One factor may be a contrast between the popular wisdom that underpins this body of law, namely, that tort liability is an incentive for safer products, and the "reality" of the automotive industry, namely, that manufacturers make safer cars because the market demands it. Babcock also touches on doctrinal difficulties with product liability law, including whether it efficiently performs its functions of compensation and deterrence. He also notes that while overall highway safety is the fundamental problem addressed by this body of law, its focus on defects in new vehicles, which cause a statistically minute portion of highway accidents, has been misplaced. Despite declines in highway fatalities, which can be attributed to regulatory action, better highway design, and automotive safety devices, the leading cause of highway death and injury is driver behavioral factors, and it is this problem that must be addressed. Commercial Aviation and Pharmaceuticals If the papers in this volume are any indication, on a continuum indicating product liability impacts on innovation, general aviation is at one end, the chemical and automotive industries are in the middle, and the pharmaceutical and commercial aviation industries are at the other end. That is not to say that pharmaceuticals and commercial aviation are immune from the system, but rather that other factors—respectively, the regulatory system and the importance of public trust—are more important considerations. Benjamin Cosgrove describes the product development cycle in the commercial aviation industry and how it responds to problems. Unlike the other industries described in this volume, however, commercial aviation sees product liability as neither a deterrent nor an incentive to innovation. The compelling reason for continuing to work toward safer aircraft is to
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Product Liability and Innovation: Managing Risk in an Uncertain Environment maintain the company's reputation in an industry where public trust is everything. This is not to say that litigation costs are not high, that such costs are not a drain on resources, or that there is not a concern that the specter of liability might inhibit the ability of the company to innovate. Nevertheless, because reputation is so important, media coverage of aviation accidents is of greater concern than product liability. Engineering practice and response to product liability in the pharmaceutical industry are influenced by the unique characteristics of the products produced, the way the products are marketed, and the fact that it is such a highly regulated industry. Marvin Jaffe describes the long, expensive process of gaining regulatory approval for drugs but notes that upon completing the process there is the assurance that the prescription drugs being put on the market are safe and effective, and that the risk of product liability has been lowered considerably as well. Nevertheless, Jaffe contends that there are some downsides for consumers from both the lengthy regulatory process and the tort system. These include negative impacts on pricing, orphan drug development, and patent protection, and constraints on innovation once compounds enter the regulatory pipeline. Product liability suits, while meant to keep harmful drugs and medical devices off the market, have also affected the availability and cost of particular critical pharmaceuticals, such as vaccines. WHAT CAN BE LEARNED FROM THESE INDUSTRY CASES? Product Liability Affects Industries Differently A number of commonalities exist among the papers in this section. One is that the primary driver of safety innovations is not the fear of product liability lawsuits. Rather, most companies continue to innovate because it is just good business practice, it is necessary to maintain the public's trust in the industry, a global marketplace demands it, or because of regulatory mandate. Although several authors mention that demands for product safety have spurred innovation, they do not equate the product liability system with those demands. The authors would also agree that the current product liability environment can act as a drag on a company by diverting critical engineering and financial resources from more productive activities. Beyond this, however, including product liability's role in inhibiting innovation, there is limited consensus among the industries. In most cases, it may be said that product liability does not inhibit innovation per se as much as it inhibits the introduction of some innovations into consumer products. Cosgrove, citing a corporate directive to continue innovating despite the prospect of litigation,
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Product Liability and Innovation: Managing Risk in an Uncertain Environment indicates that the product liability system has a marginal impact on innovation in commercial aviation. In the pharmaceutical industry, Jaffe notes that a more serious constraint on innovation is the simple mechanics of the regulatory process and that liability's impact in this industry is felt more on particular categories of drugs. Castaing, giving the engineer's perspective, notes that the product liability system has made automotive engineers more cautious about evaluating and implementing design changes, with the result that innovation is avoided or slowed.4 Babcock supports this charge, noting that the system does not give clear signals to engineers about how to design their products, but he also writes that given the global nature of the marketplace, it would be hard to name a design feature that is missing from U.S. automobiles because of product liability. The most striking examples of unintended, negative effects of the product liability system, both on innovation and generalized business practice, come from the general aviation industry and the chemical industry. Peterman and Sontag, writing about particular segments of general aviation, show an industry on the defensive, where potential business agreements are not consummated, jobs are lost, and products are simply not produced because of product liability. MacLachlan and Citron write about major suppliers of materials used in critical medical device applications withdrawing from the market because of product liability. Here one sees substantial social and economic costs resulting from the product liability system. As Sontag notes, the exit from critical industries by major U.S. producers may create opportunities for overseas competitors, which may not be in the best interest of the consumer or the United States. How Companies Manage the Risk of Product Liability In any industry, product liability risk is part of the business environment, and as such it has to be managed like other risks. What do these papers tell us about how engineering practice has changed in response to product liability to lessen exposure to that risk? Again, this varies by industry. In almost all the industries it has meant greater attention to record keeping and more careful documentation of engineering decisions. The issue of overdesign is mentioned in the general aviation and automotive industry papers. It has also meant, in the chemical and pharmaceutical industries, pulling back from R&D investment in particular product areas. At the corporate level, product liability cost control and litigation management techniques, indemnification, withdrawing from high-risk lines of business, and using technical expertise in the defense effort are all strategies for alleviating product liability risk. The papers suggest, however, that although these may be satisfactory strategies, they are not long-term solutions for dealing with product liability risk.
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Product Liability and Innovation: Managing Risk in an Uncertain Environment THE SOCIAL, LEGAL, AND REGULATORY ENVIRONMENT The synergy between the product liability system and innovation takes place in a particular social, legal, and regulatory environment. The peculiar nature of that synergy is influenced by trends in such things as the availability of insurance, public attitudes toward risk, the body of statutory law that governs products and processes, and how technological questions are dealt with by the law. The last four papers in this volume examine these issues. Insurance is one way manufacturers manage risk, and many observers contend that the unavailability of affordable insurance precipitated the ''liability explosion." Leaving it to others to argue whether or not the insurance companies brought on their own problems in the 1980s, Dennis Connolly provides the insurer's perspective on how the insurance process works. He also describes the difficulty in assessing risk of technologically complex products, particularly those that are radical innovations and those, like many drugs, that have the potential to benefit large numbers of people but possibly harm a few as well. This perplexing underwriting task is exacerbated by particular product liability principles such as joint and several liability, strict liability, and the absence of caps on noneconomic damages, which complicates the assessment of risk, even for products from the most conscientious of companies. These and other problems that inject unpredictability into the system, Connolly notes, make it difficult for the insurer either to provide useful messages about risk to manufacturers, which would act as an incentive to improve loss experience, or to provide affordable insurance at all. Peter Huber reiterates Connolly's points about how trends in product liability law have decreased the availability of intelligent, rational insurance. He focuses in particular on the problems that arise as a result of not knowing exactly what risks are being insured. The difficulty, he writes, is that as courts have become more accepting of marginal scientific theories, cause and effect has been trumpeted for risks far beyond those anticipated for a product. This lack of standards and tolerance of "junk science" in the courts, and the subsequent impact it has had on the availability of insurance, has had the most serious consequences for innovative technologies or products where rapid commercialization is most urgently needed. Huber sees the 1993 Daubert ruling, which dealt with the issue of admissibility of scientific evidence, as a step in the right direction, but describes other reforms that are also needed. Susan Rose-Ackerman provides an important element to the discussion of the role of the regulatory system, or regulation by statute, in this debate. All five of the industries represented in this book are heavily regulated. Yet, as is well understood, complying with those regulations is not a guarantee
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Product Liability and Innovation: Managing Risk in an Uncertain Environment that a firm will not be involved in product liability suits. What role, then, does the regulatory system perform, what incentives does it provide, and how does it interact with the regulatory effects of the tort system? Rose-Ackerman notes that different situations call for dependence on either torts or statutes, but that they can serve complementary roles as well. Regulatory reform through incentive-based regulatory statutes and solutions to the problem of providing compensation would, Rose-Ackerman contends, modify the judicial role and create a more efficient system, which could in turn, affect the research choices of firms. Product liability law, insurance, and the regulatory system provide means for dealing with risk. Some people have argued that the expansion of the product liability system has resulted in a redistribution of economic wealth, and that it has forced companies into a social role for which they are not equipped, namely, insurers for any and all risk. The issue of risk is central to a discussion of product liability impacts on innovation for it is both an engineering and a social question: How much risk can be designed out of a product, and at what cost? How much risk should the user of a product be expected to assume? To what degree is a manufacturer responsible for injury that results from poor decision making by the user? Have we indeed reached the point where, as Norman Augustine (1994) observes, "Our system places a greater reward on assuring that nothing goes wrong than on assuring that something goes right"? The paper by Baruch Fischhoff and Jon Merz examines how scientific knowledge about how people understand product risk can be incorporated into the product design and management process. Research in the areas of risk perception, judgment, and decision making provide insights into the ways people deal with complexity, new information, inconsistencies, and other factors that affect judgments. The authors describe how such knowledge could be applied by engineers and product designers to predict problems in the way products are used. Manufacturers could then improve warnings about potential risks as well as improve product design and the use of existing products. Unfortunately, Fischhoff and Merz note, the product liability system does not always provide incentives for manufacturers to consider behavioral issues. For example, the system acts as a disincentive if changing how risks are described on a warning label is construed as an admission that previous descriptions were inadequate. Means must be found for crediting manufacturers with incorporating behavioral issues into product stewardship. WHAT CAN BE DONE? Some may contend that the issue of impacts of a product liability explosion, particularly its effect on innovation and competitiveness, peaked in
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Product Liability and Innovation: Managing Risk in an Uncertain Environment the late 1980s and early 1990s. Indeed, many studies cited in discussing this issue were done in the mid-to late-1980s and are becoming dated as we enter the mid-1990s. In this volume, Ide notes that product liability cases have actually declined in recent years, and Babcock cites the view of two legal scholars that there has been a pro-defense revolution in product liability law. Despite this, Babcock argues that recent experience in the automotive industry does not support the contention that product liability filings are declining. It is obvious too from other papers in this volume that product liability is still a serious concern for decision makers in some industries, particularly those producing certain categories of products. Numerous solutions that would alleviate some of the more burdensome aspects of the product liability system are put forth in the papers. These solutions range from more research in certain areas through specific engineering and corporate practices that would modify the risk of product liability to legislated reform of the product liability system. Rose-Ackerman notes that although anecdotes are useful, they are incomplete as a basis for making policy. Thus, as Robert Rines pointed out in his summary remarks at the symposium on which this volume is based, there is a need for further documentation of decisions in a range of industries concerning innovation and quantification of the indirect and direct costs of product liability. Rines also suggested that more research needs to be done on whether there is a cause-and-effect relationship between product liability law and product safety. Babcock proposes a study of ways that legal systems of other countries treat "malpractice" by professional engineers, particularly ways that legal rules affecting engineering practice are communicated to the engineer. Although such research would be useful from a public policy perspective, the authors also suggest numerous strategies to help engineers manage the risk of product liability on a day-to-day basis. Schwartz discusses the importance of paying attention to quality so that manufacturing defects are minimized, exercising caution in claims made about products, and accurately and effectively communicating risks. Careful documentation of decisions made during the product development process, although time consuming, is also important. Citron notes that in addition to producing high-quality products, firms must also track performance, expand understanding of first principles, and invest in improvements. Finally, Fischhoff and Merz make a strong argument for considering behavioral factors from the earliest stages of the product design process, which may contribute to product safety. Although sweeping proposals for large-scale reform of the product liability system are frequently part of the debate on this issue, it is most likely that reform will be incremental. It will be done by individual judges and state legislatures, although Schwartz contends that some aspects of reform
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Product Liability and Innovation: Managing Risk in an Uncertain Environment should be enacted at the federal level. Babcock, Citron, and Huber argue for reforms that would exempt manufacturers from liability, or at a minimum punitive damages, if they have conformed to safety standards. Rose-Ackerman also believes that a more enlightened regulatory system is in order and would alleviate some of the more problematic areas of the tort system. Reforms that would affect the admissibility of scientific evidence were raised by several authors, including Huber and Jaffe. Huber and Citron urge the establishment of programs, similar to the national vaccine injury compensation program, for some niche products and services that have become "uninsurable." Several authors suggest that the inconsistency between laws concerning state of the art and the reality of the courtroom, where past engineering decisions are indeed judged by current standards, must be corrected. The costly and time-consuming nature of the discovery process was noted as one of the most onerous aspects of the current product liability system. Revised federal rules governing discovery, which became effective January 1, 1994, are intended to ameliorate that situation. At the state level, the American Bar Association has proposed a range of improvements concerning such things as uniformity of awards and excessive lawyer fees. In addition to these specific reforms, certain issues about the product liability system may be resolved by no less than a national soul-searching about risk, particularly private risk, and responsibility, both individual and corporate. With every transaction that involves the purchase of goods, there is an implicit understanding between the producer and the consumer. The consumer assumes that the product is not faulty or unsafe, and the producer anticipates that the consumer will employ common sense when using it. Huber contends that consumer choice and fair warning do not count for much in the current system and that they should count for more. The second issue—who takes responsibility for injury—is broached by Babcock, who challenges the reader to consider the role of social insurance, specifically the effect that enactment of a national health care system might have on the compensatory function of the U.S. tort system. Despite its benefits, the product liability system is perceived and experienced by many people, both plaintiffs and defendants, as complex, confusing, and unfair. Even though many cases can be cited that demonstrate that the system "works," the view that it does not work effectively for everyone and that it works inefficiently cannot be ignored and needs to be addressed. The ultimate irony may be that a body of law that was designed to reduce risk has in the end created more risk and uncertainty. Moreover, it treats alike both conscientious companies and those that knowingly commit acts that can cause harm. By altering the behavior of responsible companies, product liability law diminishes benefits to society.
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Product Liability and Innovation: Managing Risk in an Uncertain Environment Safe products and innovation are desirable goals that are in the public interest. The product liability system must ensure that they are not mutually exclusive. NOTES 1. Examples of mass torts include the Dalkon Shield, with 325,000 cases, and asbestos, with over 60,000 cases settled, 100,000 cases awaiting action, and 2,000 more filed in court each month (Committee for Economic Development, 1989; Russakoff, 1994). 2. The median 1993 after-tax return on sales of the Fortune 500 is 2.9 percent (Fortune, April 18, 1994, p. 280). 3. One of the persistent uncertainties in trying to understand the costs and benefits of the U.S. product liability system is the costs borne by companies for legal representation whether a suit is settled or proceeds to a final conclusion. Since 90 to 95 percent of all civil cases are settled (see Ide, in this volume), it is likely that a considerable portion of a company's resources expended in product liability litigation are not related to jury awards. 4. In spite of regulatory pressures, some automotive braking systems and air bags were slowed in coming to market in the United States because of product liability concerns. REFERENCES Augustine, Norman R. 1994. Is any risk acceptable today? Across the Board 31(May):14–15. Breyer, Stephen. 1993. Breaking the Vicious Circle: Toward Effective Risk Regulation. Cambridge, Mass.: Harvard University Press. Committee for Economic Development. 1989. Who Should Be Liable? A Guide to Policy for Dealing with Risk. Washington, D.C. Cortese, Alfred W., and Kathleen L. Blaner. 1989. The anti-competitive impact of U.S. product liability laws: Are foreign businesses beating us at our own game? The Journal of Law and Commerce 9(2):167–205. Fortune. April 18, 1994. The Fortune 500: The Largest U.S. Industrial Corporations. 129(8):216–313. Harrington, Scott, and Robert Litan. 1988. Causes of the liability insurance crisis. Science 239(February):737–741. Hensler, Deborah R., Mary E. Vaiana, James S. Kakalik, and Mark A. Peterson. 1987. Trends in Tort Litigation: The Story Behind the Statistics. Report No. R-3583-ICJ. Santa Monica, Calif.: RAND. Hensler, Deborah R., M. Susan Marquis, Allan F. Abrahamse, Sandra H. Berry, P. A. Ebener, E. G. Lewis, E. A. Lind, Robert J. MacCoun, Willard G. Manning, J. R. Rogowski, and Mary E. Vaiana. 1991. Compensation for Accidental Injuries in the United States. Report No. R-3999-HHS/ICJ. Santa Monica, Calif.: RAND. Litan, Robert E., and Clifford Winston, eds. 1988. Liability: Perspectives and Policy. Washington, D.C.: Brookings Institution. McGuire, E. Patrick. 1988. The Impact of Product Liability. Conference Board Report No. 908. New York: The Conference Board. Peterson, Mark A. 1987. Civil Juries in the 1980s: Trends in Jury Trials and Verdicts in California and Cook County, Illinois. Report No. R-3466-ICJ. Santa Monica, Calif.: RAND. Reubi, Marie, and Jill Foster. 1994. 1994 Current Award Trends. Horsham, Pa.: LRP Publications.
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Product Liability and Innovation: Managing Risk in an Uncertain Environment Russakoff, Dale. 1994. Asbestos pact: Legal model or monster? The Washington Post. May 11. A1, A12–A13. U.S. Department of Justice. 1986. Report of the Tort Policy Working Group on the Causes, Extent, and Policy Implications of the Current Crisis in Insurance Availability and Affordability. Washington, D.C.: U.S. Government Printing Office. U.S. Department of Justice. 1987. An Update on the Liability Crisis. A report of the Tort Policy Working Group. Washington, D.C.: U.S. Government Printing Office.
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