Product Liability and Innovation: Managing Risk in an Uncertain Environment (1994)

R. WILLIAM IDE III

Excellence in engineering in the United States has led to the design, manufacture, and sale to the world of the most innovative, efficient, durable—and safest—products on the market. It also made this country the world's leading manufacturing economy, creating unprecedented prosperity for its citizens. America's high-priest engineer, Buckminster Fuller, was an architect, a philosopher-poet, and an almost mystical optimist. With his crotchety single-mindedness, Fuller once said, "there is absolutely nothing that cannot be done." He also believed that "man can create miracles." The work engineers do on a daily basis is an affirmation of that belief in man's abilities.1

Our forefathers, when they created the American system, recognized the role freedom plays in unleashing this economic and social creativity. But they also saw another important requirement, and they created a justice system that has helped preserve our freedoms for more than 200 years. Few Americans would trade their justice system for that of any other country. By the same token, other nations have looked to the American justice system as a model for their own. This can be seen most recently in the way former Soviet bloc countries have studied and replicated many aspects of our justice system.

The fall of the Eastern bloc demonstrates that people cannot efficiently design and produce goods with strong government controls and directives such as those that were enforced by the Communist system. The genius of a capitalistic system is that it allows individuals to pursue their self-interests with minimal government involvement.

How is this accomplished in an orderly and consistent way, without some taking advantage of others? It is done through the rule of law. The United States is a free society, and neither government nor vested interest groups can infringe on certain basic personal freedoms. It is the right of every citizen to protect his or her legitimate interests within an independent judicial system. How to determine the legitimate interests of citizens and how to balance them against the concerns of others is what the law is all about. Nowhere is this more challenging for legislatures and courts than in the area of product liability.

The free market system and capitalistic ethic foster the continued growth of innovative product development in this country. But product development is dependent on consumers who are secure in the belief that they will be helped if injured through no fault of their own by a defective product. When government regulations or industry self-regulation fail, it is necessary to have a system that can identify and correct these products.

In the United States, the product liability system has been developed, through statute and case law, to compensate injured consumers and deter harmful products. Statistics on accidents demonstrate why this is important. Although the consumer product may not have been the cause, consumer products are involved in an estimated 29,000 deaths—more than die each year from such diseases as prostate cancer or emphysema—and 33 million injuries in the United States every year.2

In other industrialized countries, those who are injured generally receive far more benefits from government entitlement programs than their counterparts in the United States. They have, in effect, a government-funded social safety net for accidental injuries. The result is a system in which those injured by defective products are largely compensated by the taxpaying public at large, not by the manufacturer who made the product.3

In the United States, there is more reliance on the civil justice system to seek compensation for those who are injured by defective products. Generally, government and tax dollars are left out of the process, and the maker of the product pays the injured party directly.

Injured consumers clearly need such assistance. Health care costs have skyrocketed. Although private insurance and workers' compensation provide some coverage, it is often inadequate. It is not unusual for someone completely disabled, who needs around-the-clock medical assistance, to have bills of several million dollars in the first few years alone. If, for example, a 25-year-old carpenter who earns $25,000 a year is severely injured and cannot work again, the financial loss in wages alone is at least $1 million over the expected career.

In discussing the issue of product liability, it is necessary to get past much of the inaccurate rhetoric. First, the product liability system is not out of control. In recent years, critics have cited the figure of 18 million civil lawsuits filed every year as evidence that the product liability system has gotten out of hand. However, the great majority of those cases were small claims, divorces, probate matters, and contract disputes.4

Tort cases, excluding small claims, are about 2 percent of the total state court caseload and 10 percent of the civil docket. Product liability cases are tort cases, but torts also include any case in which someone's person or property is damaged and covers everything from auto accidents to wrongful death.5 Federal court records and estimates by the Conference of Chief Justices of the states show that product liability cases have declined in recent years.6

Rather than product liability, other kinds of lawsuits have overwhelmed our legal systems. Corporate commercial cases—businesses suing each other—have accounted for the greatest growth in federal court lawsuits. The most serious problem with our courts, however, has come with the deluge of criminal, mostly drug-related, cases that squeeze out civil cases. Between 1990 and 1992, 10 states had to close their courts to civil cases temporarily because of the huge surge in criminal cases.

Second, product liability damage awards have not been soaring. This misconception seems to be based on anecdotes and small samples and ignores the far more thoughtful studies. The most comprehensive study so far about product liability cases was released by the General Accounting Office (GAO) in 1989. It studied all cases that went to trial in five states. Of the 305 cases studied, it found that plaintiffs won less than half the time. Even when they did win, the GAO found, many of the awards were reduced on appeal. Moreover, only 21 of the 305 cases resulted in compensatory damages of $1 million or more, and all were because the victim was either killed or permanently disabled.7

Recently, the Roscoe Pound Foundation studied punitive damages in state courts from 1965 to 1990. The foundation discovered that during that 25-year period there were only 355 product liability cases nationwide in which punitive damages were awarded. In fact, the odds of a U.S. manufacturer being assessed a single punitive damages award were less than one in 1,000.8

Third, Americans are not overly litigious in the product liability area. A recent RAND study found that only 10 percent of the victims injured by accidental injuries ever use the tort system. The report concluded that

"[m]ost Americans who are injured in accidents do not turn to the liability system for compensation. In this respect, Americans' behavior does not accord with the more extreme characterizations of litigiousness that have been put forward by some."9

Unless they are wealthy, injured persons must find a lawyer to work for contingency fees and to shoulder expenses that can be staggering in lengthy proceedings. In one study, the median cost for preparing a case for punitive damages was $30,000, excluding lawyers' time. Because of these costs, lawyers cannot afford to take on questionable cases or even many legitimate ones.10

Fourth, America's product liability system has not stifled innovation, led to higher prices, and caused American manufacturers to become less competitive. A system that is reported to add less than 1 percent11 to the retail price of products cannot be blamed for America's competitiveness problems of the 1970s and 1980s. Americans do not buy Japanese cars, Korean videocassette players, and German machine tools because the U.S. liability system imposes such a heavy burden on manufacturers; the causes of U.S. competitiveness problems go much deeper. Also, foreign manufacturers do not enjoy an unfair advantage when selling their products in the United States—they must meet the same product liability standards as American firms.

The 1980s were a decade of major studies of American competitiveness. As compiled by the Council on Competitiveness, there were 14 such major studies by councils or commissions from 1982 to 1992. They included the Business Roundtable, the MIT Commission on Industrial Productivity, the Carnegie Commission on Science, Technology, and Government, the Congressional Office of Technology Assessment, the Department of Commerce, Department of Education, and four by presidential committees or commissions. In only one of those reports, by the Business Roundtable, was the product liability system cited. Even there, it was relegated to a few paragraphs in a lengthy study. In the other 13 studies, the most authoritative over the span of a decade, not a single one of them listed the product liability system as even a minor part of our nation's competitiveness problem. The most frequently cited problems affecting our competitiveness were short-term management strategies, cost of capital, technology transfer problems, worker skills, and trade barriers elsewhere.

Unlike the heavy hand of government regulation, the liability system enforces voluntary safety standards without prescribing every precise operating and technical detail. It dictates results, instead of methods, and thus encourages innovation and self-regulation. This was documented by a 1987 Conference Board report, Product Liability: The Corporate Response, which surveyed the risk managers of 232 large U.S. corporations. The

study found that "the pressures of product liability have hardly affected larger economic issues, such as revenues, market share, or employee retention."12 The Conference Board study continued, "Where product liability has had a notable impact … 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."

Furthermore, it is most telling that many of the United States' competitors are moving toward a system that is more similar to the American system of product liability. For example, the European Community adopted a directive on product liability that required member nations to enact legislation the result of which would make their systems closer to the American system.13

Despite these benefits, the product liability system can and should be improved. The U.S. justice system mirrors U.S. society. As science and technology have advanced, new products have come cascading into the marketplace, consumer protection groups have grown, and the legislatures and courts have faced new and complex challenges. In some situations, the system has not been up to these demands. The American Bar Association (ABA) has conducted studies to look at this issue and developed the following recommendations:

1. The ABA supports narrowly drawn federal legislation for occupational diseases, such as asbestosis, when the disease has long latency periods, the damages threaten significant numbers of manufacturers, and the claims have excessively burdened the judicial system.

2. At the state level, the ABA supports many improvements in the tort system. For example:

   • Annual studies of tort awards, and guidelines to encourage uniform awards.

   • A tough "clear and convincing" evidence standard for punitive damages, levying them only when there is a conscious or deliberate disregard for safety.

   • Strong court sanctions against frivolous lawsuits.

   • Courts disallowing excessive lawyers' fees.

   • Limits on joint and several liability to economic loss in certain cases. Defendants should not have to pay someone else's share of noneconomic loss they had little or nothing to do with.

   • Strong court controls on excessive pain and suffering awards.

While great attention is given to many of the details of the product liability system, the greatest threat to manufacturers and consumers is the excessive costs and delays in our civil justice system. This is due in part to the lengthy process of stop-start discovery and motions. The situation is aggravated by the increase in criminal cases, which is bleeding resources from our civil justice system. The system has become too slow, too costly, and too inaccessible for most Americans.

We must have a revolution in our justice system. As a start, the ABA has met with more than 30 national organizations interested in the civil justice system. The issues discussed included ways to

1. Streamline discovery and reduce its cost.

2. Force parties to confront serious settlement discussions at the start of a lawsuit. Ninety to 95 percent of civil cases ultimately settle, so it is beneficial to settle them before substantial costs and client time are incurred.

3. Institute new procedures designed to produce earlier and cheaper resolution of matters.

As an example of the third area of change, the ABA helped pioneer a program in the 1970s called the Multi-Door Courthouse, which encourages alternatives such as arbitration, mediation, and conciliation. Today, there are more than 1,200 court-related programs that help solve entire categories of civil suits with such alternative dispute resolution methods. So far, these techniques have had limited use in product liability cases with the exception of automobile and toxic tort cases. But the potential for shifting from courts and litigation to quicker and cheaper forms of resolving disputes is great. To paraphrase psychologist Abraham Maslow, "if the only tool you have is a hammer, then every problem looks like a nail." The gentle nudge of conciliation can often spare people from the sledgehammer blows of a trial.

People from all walks of life must work together if the U.S. justice system is to be maintained and improved, and if its goal—justice for all—is to be realized. Scholars can study the problems with our justice system, lawyers can advocate change, and judges can render verdicts. But in the end, it is the public that must decide what is best. The ABA plans to take the best ideas now being developed to improve the system to the Congress and out to the states where it will encourage the creation of state justice commissions. These commissions will bring leading members of the state bench, bar, court administration, and public together to design, among other things, a faster and less expensive means of conducting the business of the courts. From their efforts is likely to come a package of improvements reflecting the concerns of the local legal culture as well as the type

of improvements the ABA has discussed with various other national organizations.

Members of the legal profession share engineers' commitment to building the best products in the world and to having America compete and win in the global marketplace. America's product liability system is a competitive advantage, not a disadvantage, because it results in safer products with minimal government interference. More important, it provides a fair, open system in which consumers with legitimate claims can be protected while also shielding manufacturers against unwarranted claims.

In the long run, America will continue to succeed as an economic power because it is also a just nation in which people have the opportunity to work and succeed, and in which people can be confident that the justice system will treat them fairly. The workings of the U.S. justice system are not perfect, but its goals are. The great jurist Benjamin Cardoza stated, "Justice is not to be taken by storm, she is wooed by slow advances."14 As the legal community "engineers" these advances, it will work with technologists and others to accomplish this important task.