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Product Liability and Innovation: Managing Risk in an Uncertain Environment The Chemical Industry: Risk Management in Today's Product Liability Environment ALEXANDER MacLACHLAN The ability to innovate is the key to business success in virtually every industry, but nowhere is this more true than in the chemical industry. This paper will describe how the current product liability environment has affected innovation at one company in that industry—DuPont. DuPont participates in more than 30 major businesses based on its chemical processing skills. These businesses include agrichemicals, polymers, synthetic fibers, fine and commodity organic and inorganic chemicals, photographic materials, energy, electronic fabrication materials, and many others. DuPont is in virtually all these businesses either because the technology was invented at DuPont or because its innovative processes and products give it an advantage over its global competitors. DuPont also has developed broadly diversified businesses outside the chemical industry that manufacture finished products such as STREN® fishing line and mammography film, medical products such as the ACA® Discrete Clinical Analyzer + Reagents, and pharmaceuticals such as Coumadin® and Percodan®. Innovation in the supply of raw materials such as chemicals, plastics, fibers, and electronics has a dramatic effect on the ability of businesses and industries to innovate in making and selling improved and competitive finished products. RISK MANAGEMENT The manufacture of most raw materials and finished products requires the application of risk management skills. The risks for raw materials operations
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Product Liability and Innovation: Managing Risk in an Uncertain Environment typically include business, manufacturing, handling, and environmental disposal risks. Risks for finished product operations include finished product design analysis, consumer labeling, and product safety risks. These are only a few of the risks that businesses consider. For example, in the past three decades the phenomenon of injury litigation has become a major risk that is having a chilling effect on innovation in many American industries. Chemical manufacturing processes are almost always run at high temperature and pressure and involve toxic chemical intermediates, or in some cases, extremely dangerous end products. Examples of these end products are concentrated hydrogen peroxide, which is used by the paper industry, and sodium cyanide, which is supplied to the mining industry. DuPont chooses to supply these materials based on its ability to manage risks and to protect its employees, customers, investors, and the environment. Safety and risk management are a way of life for DuPont employees who work with chemicals. Despite the inherent dangers in manufacturing and handling chemicals, industrial safety statistics show that the chemical industry is one of the safest industries, and DuPont has one of the best employee safety records. In fact one of DuPont's businesses sells safety training to other companies, including the contractors that constructed the Channel Tunnel between France and the United Kingdom. DuPont's risk management procedures are elaborate and ever-improving. Risk management pays, not because it prevents lawsuits, but because risk management is good business. The company benefits from providing a safe workplace because its employees are at work applying their skills instead of absent on sick leave. By shipping and handling materials and by running plants carefully, DuPont is welcomed throughout the United States and the rest of the world as a responsible manufacturer. Providing technical assistance to customers when requested helps those customers achieve success and also enables DuPont to become the preferred supplier for those customers. By helping clients dispose of waste, or even entering into partnerships with them and their customers to recycle products after their useful life, DuPont further enhances its reputation as a desired supplier. DuPont's reputation is critical to its success. One risk management process that helps accomplish these objectives is called product stewardship. Every material that is proposed for development and eventually sold is initially and periodically thereafter subjected to a rigorous analysis for hazards related to safe transport and recommendations for safe handling and disposal. In addition, if a product, sodium cyanide, for example, has unique hazards that require a special level of customer sophistication, risk management procedures are designed to ensure that the customer meets these requirements. In these special instances, sales may be refused to customers who do not meet the risk management
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Product Liability and Innovation: Managing Risk in an Uncertain Environment requirements. The frequency with which DuPont goes through this process depends on the risk category of the material. Every business sector in DuPont has a product steward coordinator for administering the product steward program. The business manager of the product line is personally responsible for product stewardship, and every single material has a designated product steward. The principal responsibility of the product steward is to analyze the general hazards of the basic material related to safe transport, safe handling and disposal, employee safety, toxicity hazards, and environmental impact both during development and on an ongoing basis. The steward also certifies compliance with regulations and advises customers of the general hazardous properties inherent in the raw material; reviews material safety data sheets, labels, and product literature; visits the customer when necessary; and identifies anticipated future requirements and trends and helps adjust business strategies accordingly. Product stewards are expected to be current on all aspects of these responsibilities. All reviews are formal and are applied globally. Some would contend that these practices are one positive offshoot of product liability. To the contrary, companies do these things because they are good business practices and are critical to remaining competitive. BROAD IMPACTS OF PRODUCT LIABILITY LITIGATION Unfortunately, injury litigation has become a routine occurrence in America. This phenomenon has been fueled by the ability of some segments of the legal profession to make hundreds of millions of dollars in contingency fees, too often by misconstruing facts in order to orchestrate popular opinion. The hidden cost of this speculation in the "legal stock market" is a chilling effect on the freedom and ability of Americans to innovate. By definition, innovation is controversial until it is accepted as the norm. Then it becomes a success. All innovation begins with a willingness to risk failure, which is essential to innovation. All of civilization's great technological advances began with failure. When litigation excessively punishes the risk taking intrinsic to innovation, it deters innovation. There is a far greater risk to society from making avoidance of risk at any cost the law of the land. These risks include technology stagnation, loss of competitiveness, and loss of economic standing in the world. The results may be diffuse and difficult to quantify, but the effect on each of us and on future generations will be real. What is billed as legal compensation for a wrong done, in other words, damage allegedly done by DuPont materials or by finished products made by other companies from DuPont raw materials, results in extremely costly
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Product Liability and Innovation: Managing Risk in an Uncertain Environment litigation. Whether or not the litigation is successful, there are still huge losses in time and financial resources, which chill innovation and investment. In 1993 the company's long-range R&D budget was reduced by an additional $12 million because corporate legal costs had increased by 25 percent over the year before. In addition, there is a tremendous drain on the emotional resources and the time of management and other employees who are deposed. Employees who have gone through depositions say they will never apply their intellectual and technical skills again in areas where they may have to endure the humiliation and accusations associated with these cases, which to them appear baseless and driven by financial motives. It is often noted that the liability environment is very different outside the United States. DuPont's experience certainly supports this contention. Although 50 percent of DuPont's sales are generated outside the United States, less than 0.5 percent of the liability cases originate there. The justification for litigation is couched in the noble-sounding objective of "deterrence of harmful behavior." It is difficult to demonstrate scientifically whether or not this purpose is being served. One unintended consequence, however, is that the chemical industry is beginning to deny new and existing materials and products to society. This in turn is affecting U.S. competitiveness. IMPACTS ON NEW MATERIALS AND MARKETS The following examples demonstrate how the ability to innovate into new materials and markets is being affected. In 1989 a business opportunity, using one of DuPont's elastomer products as earthquake shock absorbers for buildings, was identified. The size of the business for DuPont was modest—a relatively small number of pounds per year at $2 per pound of material. However, due to the high likelihood that litigation would follow if an earthquake actually occurred, DuPont decided not to pursue that opportunity. The risk of litigation, not a technology problem, dictated that decision. It has become commonplace for litigation to follow any accident, regardless of the cause. It seems that someone always must be blamed or found at fault; thus, litigation becomes an inevitable risk. Another example of the chilling effect of inevitable litigation on innovation can be found in the field of medical devices. This does not refer to breast implant litigation, in which DuPont has no involvement. Rather this refers to the current refusal of several raw material suppliers to sell any raw materials to companies or researchers working in the field of permanent medical implants such as artificial hearts, pacemakers, hip replacements, vascular grafts, and thousands of other useful finished products. Typically, medical devices are small and lightweight, requiring only a
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Product Liability and Innovation: Managing Risk in an Uncertain Environment few cents worth of raw material. For example, a single device might contain five cents worth of raw material. One thousand devices would contain only fifty dollars worth of raw material. Yet today a raw material supplier can be forced to defend itself in court for having sold a perfectly good raw material to a medical device manufacturer when the device ends up in litigation. Even if the raw material supplier is found innocent and without liability in all of the cases, it can cost millions of dollars in defense costs. The litigation tarnishes the reputation of the company, distracts employees from normal operations, and guarantees that employees will never pursue developing or selling products used in the medical device field. This predicament has prompted DuPont to examine its policies toward selling materials used in medical applications. In 1993 the company established a new policy that prohibits sales to companies and researchers using its materials in permanently implantable devices of any kind, unless we are involved in the design of the article and control its application. Any other course of action would be detrimental to the future of the company. This policy will be implemented over a period that will give time for customers to substitute other suppliers or make the substitute products themselves. As a result, any new business ideas or new concepts for synthetic material for internal-use medical devices will have a very small likelihood of getting R&D dollars. Since DuPont cannot limit or justify the risk, either through regulatory standards or reasonable assessment of potential financial liability, it will not work in these areas and will forbid use of DuPont materials or expertise to be applied in these areas. This is extremely discouraging and frustrating for scientists in a corporation with the technical capability to make all kinds of new materials. The impact is even broader. Should DuPont strive to make substitute materials for metals in automobiles, airplanes, liquid and gas pipelines, or any use where there is some future risk of failure, especially where the failure may occur in the long term or only when millions of units are in operation under a myriad of different conditions? Obviously it is necessary to continue to innovate and accept reasonable risk. However, when even the best attempts to control litigation costs fail, DuPont will have to invest elsewhere. Sadly many of these potential investments will be made by competitors in other countries and will reach the United States only long after the improved human welfare and newly created jobs are enjoyed elsewhere. DuPont's Kevlar® superstrength fiber business provides an opportunity for conjecture on product liability trends. Kevlar® fiber is used in all kinds of reinforcement applications, including as a substitute for asbestos in brakes and as a fiber in bullet-resistant vests. Bullet-resistant vests are a good business with modest importance as a revenue and earnings generator. However, the business is more than that to all those policemen whose
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Product Liability and Innovation: Managing Risk in an Uncertain Environment lives the vests have saved—it is a matter of life and death. Since DuPont makes only the fiber and customers make the vests, it is uncertain whether the company would go into such a business today. As mentioned earlier, product safety is important because it is vital to business success. This author has never thought that the ever-increasing demands for product safety dampened innovation. Quite the contrary—such demands are invigorating and responding effectively to them can pay enormous dividends. However, for the first time in a long career, this author is spending time looking at markets from the point of view of avoiding risks that are unquantifiable or that put DuPont in high opportunity areas that, while valuable for mankind, have too much downside if we make a mistake. SOLUTIONS What can be done so that the public is protected from careless activities of industry, but at the same time industry is not driven to avoid important, but initially risky innovations? It is common business practice to assess, quantify, and gain control of business opportunity risk. The U.S. tort liability system, with its trend toward strict and even absolute liability, frustrates that practice. There seems to be a growing perception that anyone can and should sue for everything, regardless of the facts. The solutions, as I see them, must involve all members of society: There is a need to make the legal system more compensation-focused than deterrent-focused. When mistakes are made and no laws are violated, there should be no incentive to invent evil intent. The monetary incentive to achieve enormous financial gain through punitive damages and the destruction of the reputation of responsible companies and their employees must be stopped. Ridiculously high awards in the name of deterrence enrich the legal profession, but do not improve the behavior of companies. Standards must be set to help manage risk both before the fact and while the product is in use. Businesses should not be punished when they have met state-of-the-art standards, even if current practices are different. It is necessary to understand how the current system is affecting our society, particularly in terms of lost benefits from innovations not pursued. CONCLUSION DuPont makes outstanding materials that do remarkable things—from artificial limbs through fire-resistant materials to bullet-resistant vests.
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Product Liability and Innovation: Managing Risk in an Uncertain Environment Customers at the leading edge of innovation seek to use our remarkable materials in their products. Some succeed with their ideas, some do not. We do not claim expertise in all our customers' fields, but we work hard to make sure we represent our materials accurately and sell them to reputable customers. We look for assurance that our customers have secured the required approvals for manufacturing their products and meet appropriate standards. But, today, we find that these safeguards are no longer adequate. The consequences strike at the foundation of America's quality of life and standard of living. Quality materials are part of the solution of many of society's problems. They are key ingredients in achieving each of the following societal goals: Food and shelter for an exploding population. Energy-efficient forms of transportation. Cost-efficient health care. Faster communications. A faster, more flexible defense. Cleaner industries for a healthier environment. Revitalized infrastructure to support our move into the twenty-first century. Actions that result in a cut-off in the supply of those materials means innovation will slow. These solutions will come more slowly or perhaps not at all. Countries with different tort law systems will benefit sooner from these solutions and may indeed own them and export them to countries like the United States. Responsible behavior of companies is driven by the simple fact that such behavior is vital for continued business success. Although irresponsible companies should be held accountable for defective products, frivolous lawsuits do not make already responsible companies more responsible. Rather they cause those companies to pull back from areas of R&D that are perceived as too risky in the current climate. In the end, the public suffers because innovations are not pursued that may make products safer and that may create better jobs and an improved quality of life.
Representative terms from entire chapter: