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OCR for page 169
The Role of the Legal
System in Technological Innovation
arid Economic Growth
MILTON KATZ
The current objective of the legal system should be to promote
economic growth, technological innovation, produciivity, and inter-
naiional competitiveness while protecting consumers, workers, and
the environment from the harmful side effects of technology and
industrial indifference or mismanagement. The objective should be
pursued in the endless variety of particular applications of law,
engineering, economic policy, and business management. This would
reflect the appropriate interplay between the two central and con-
tinuing historic themes of growth and social equity in the coraem-
porary nail and international setting.
Businessmen, engineers, and economists typically tend to perceive the
legal system as a source of constraints. In this chapter, I shall try to clarify
He constraints along three primary lines of inquiry. First, ~ shall show how
the legal system not only constrains but also facilitates and promotes business
enterprise, technological innovation, and economic thought. Second, I shall
indicate the scope and nature of the burdens placed on the legal system by
modern technology and economic organization. In so doing, ~ shall trace a
reciprocal relationship between Pose burdens and the constraints on tech-
nological and business activity prescribed by He legal system. Third, I shall
examine the function of law in setting limits and defining channels within
which business enterpnses and engineers must fit their activities. In so doing,
I shall attempt to show how He distribution of emphasis between the facil-
itating and the constraining fimctions of law in regard to technology and
economic organization has been affected by He interplay between two central
and continuing themes of the American expenence. I have in mind He theme
of grown, expansion, exploratory venture, and innovation Hat has been
endemic in American society from its beginning; and He theme of inalienable
169
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170
MILTON KAn
personal nights, fair shares, and social equity that has been endemic since
its proclamation in the Declaration of Independence and its lusty restatement
in the administration of Andrew Jackson.
THE LEGAL SYSTEM AS FACILITATOR
In relation to business enterprise, technological innovation, and economic
thought, the legal system not only constrains but also facilitates and promotes.
The law not only sets limits and defines channels within which economic
activity must take place, but also provides institutions that foster business
activity and serve as part of the infrastructure of economic thought. Let me
remind businessmen and economists of the role of property and contract in
relation to the market; and let me remind them also that property and contract
are legal institutions. It is obvious that no market could operate in the absence
of property and contract. It may not be obvious but it is nevertheless true
that economists could not even have conceived of the market in the absence
of property and contract. Economists and businessmen have taken property
and contract for granted in much the way that they have taken the national
language for 'granted as integral to Heir processes of thought. This is probably
why they hardly even think of such institutions when they contemplate the
legal system.
There are other legal institutions, not quite as pervasive as property and
contract, that work powerfully to promote business enterprise and engineering
innovation. There is, for example, the corporation, through which capital
from many sources can be accumulated and applied to production and dis-
tnbution under the protection of limited liability for the participants. The
law also makes available other forms of organization for economic activity,
such as partnerships and trusts and trusteeship. There are the institutions of
patent and copyright to "promote the progress of science and useful arts,"
in the language of our Constitution. There are various systems of insurance
against risk provided by the legal system. Bankruptcy is a dreary prospect
for a particular business enterprise, but in the large, this legal institution and
its correlative, reorganization, make possible the orderly disposal of economic
debris and fresh starts for business enterprises.
The legal system also performs its enabling function in ways that are more
technical and less easily recognized than in the prominent legal institutions
that I have just mentioned. I offer an illustration from the economic and
accounting, analysis of costs. In recent years, the extensive public and political
debate about environmental protection has semipopularized the concepts of
`'externalities,'' "external diseconomies," and "external costs" introduced
into economic analysis by Alfred Marshall and refined by his student, A. C.
Pigou. The existence and nature of such "external diseconomies" were
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L FOAL SYSTEM'S ROLE IN INNOVATION AND ECONOMIC GROUrTH
171
discerned through fresh and penetrating analysis, but as far as I have been
able to ascertain, neither Marshall or Pigou nor modern economists and cost
accountants appear to have given much heed to the source of the "exter-
nality," i.e., to what makes a particular cost internal or external. The re-
lationship of the legal system to this matter has been overlooked too long
and too often. The externality of external costs derives neither from the
fundamentals of economics nor from the nature of business nor from tech-
nology. It derives from the legal system. If the legal order requires a cost
arising from a company's operations to be borne by the company, the cost
is internal. If the legal order permits or requires such a cost to be paid or
suffered by others, the cost is external. Damage to the environment from
pollutants emitted by a petroleum refinery or an electric power company or
a steel plant or any other enterprise will be a '~social" and "external" cost
only if and to the extent that the legal system so decrees.
To a degree deliberately and to a degree as a collateral consequence of
doctrinal evolution rooted in other phases of legal experience, it has been
the legal system that has determined the allocation of the costs of environ-
mental damage arising as a side effect of human enterprise. If and when the
law accepts the initial incidence of such a cost as external to He enterprise,
it facilitates the operations of the enterprise by relieving its accounts of a
particular cost. If and when the law chooses to alter the initial incidence of
such a cost by recognizing a cause of action for a money judgment or an
injunction by a victim of environmental drainage against an enterprise that is
the source of the damage, it constrains the enterprise by adding a particular
cost to its accounts. Apart from lawsuits for money damages or injunctions,
such a shift from facilitation to constraint may take place through a variety
of other legal means. The law may permit the persons involved to modify
the incidence of a cost by giving effect to negotiated agreements among
them. It make seek to alter the form and to shift the impact of the cost by
taxation. In the case of common camers and public utilities or similarly
regulated enterpnses, the cost of environmental damage may be reallocated
through the orders of regulatory agencies setting rate levels or defining rate
bases or methods of accounting.
Whatever the legal means may be for maintaining or altering the incidence
of a cost, what determines the choice? What governs the balance of emphasis
between facilitation and constraint in the function of law affecting cost al-
location? The question is a particular illustrative expression of a general and
fundamental inquiry to which I shall return later: What governs the balance
between promotion and constraint generally in the functions of law? At this
point, let me briefly shift our angle of vision from the effects of law on
technology and the economy to the effects of modern technology and eco-
nomic organization on law and lawyers.
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172
~lLTON KA7Z
..
EFFECTS OF TECHNOLOGY AND ECONOMIC
ORGANl7ATION ON LAW
In 1967, Congressman Emilio Q. Daddano of Connecticut, then the chair-
man of the Subcommittee on Science, Research and Development of the
House Committee on Science and Astronautics, introduced a bill "to provide
a method for identifying, assessing, publicizing, and dealing with the im-
plications and effects of applied research and technology'' (H.R. 669S, 90th
Cong., 1st sees., March 7, 19671. Recognizing that the implications and
effects of technology were beyond measure, Congressman Daddano sought
to foster useful discussion by holding hearings on the bill in the form of a
"Technology Assessment Seminar" (U.S. Congress, 19671. The witnesses
at those heanngs, drawn from industry, the professions, universities, and
learned societies, stressed the vastness and intricacy of the problems to be
investigated, along with the unavoidable need to find a way to come to grips
with them. The Subcommittee on Science, Research and Development then
turned to the National Academy of Sciences and the National Academy of
Engineering for help, requesting that Hey undertake parallel studies of tech-
nology assessment, Ming into account the respective roles of business en-
te~prises, the scientific and technical communities, He social sciences, the
executive branch of the government, Congress, and the legal system.
In its report, He National Academy of Sciences (1969:~) stressed He scale
and complexities of the problems in an observation defining its inquiry:
Conceived most broadly, any inquiry into the interface between technology and the human
habitat may become an inquiry into the entire universe of questions that bear upon Me
most critical problems of contemporary civilization
The National Academy of Engineering, (1969:21) in its report emphasized
a balance of functions to be served:
Technology assessment consists of ~ mixture of warning signals and visions of on
portunity. Warning signals arise when the analysis predicts trends leading toward adverse
consequences. Similarly, the analysis can point to actions Mat give promise of substantial
improvements in the national quality of life. It is most important that assessment pariic-
ipants pursue with equal fervor the development of both Me creative possibilities of
technology and the defensive needs of society.
The National Academy of Sciences conducted its investigation through a
special panel. The panel's report drew a distinction between technology in
the sense of a particular engineering instrument—e.g., an automobile, a
pesticide, a dmg and technology in a comprehensive sense encompassing
the particular instralment's supporting system, which comprises the organi-
zations for production and distribution together with the economic, social,
legal, and governmental Manx. The panel insisted on the need to understand
and deal with technology in both senses. In He case of the automobile, the
.
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LEGAL SYSTEM'S ROl F IN INNOVATION AND ECOIVOMIC GROWTH
173
supporting system includes such factors as the highway system, installment
credit, traffic regulations, police administration, parking facilities and zoning
requirements for off-street parking, automobile purchase taxes, gasoline taxes,
insurance, and tort law relating to automobile accidents. This illustrative
enumeration of the elements of the supporting system for a single instrument
of technology, the automobile, indicates the nature and scope of the tasks
cast upon the legal system by modern technology in the widest sense. Apart
from the items that are explicitly legal in the automobile's supporting sys-
tem e.g., tort law, traffic regulations, and taxes many of the other items
also engage the legal system in a variety of ways. The organizations for
production and distribution involve corporation law; installment credit in-
volves the law of contract, sales, and commercial instruments; zoning re-
quirements engage real property, municipal corporations, and constitutional
law; and so on throughout the range of these multiple factors. In the operation
of so vast a system of interlocking elements, human friction and controversy
will be unavoidable. This engages still another of the many functions of law,
one that is fundamental and pervasive: to seek to resolve human controversies
through orderly processes and on a basis of principle.
The lawyers who, whether as legislators, judges, commissioners, or prac-
titioners, have borne the responsibility for designing, adapting, and applying
the legal system to this extensive array of changing factors have had to take
their departure from previously evolved bodies of doctrine, institutions, and
procedures. They have also had to take their departure from the complaints
of public groups or private clients who have fumed to them for assistance
. . , . , ~ . . .
In see slug reller from insures.
In the terms of technology assessment, injuries suffered by consumers of
a manufactured product, occupational injuries to workers in the workplace,
. . . .
ant environmental Injuries to a community or a region caused by emissions
from an industrial plant are side effects of technology and its applications.
In the terms of law, such injures are either "accidents" or "wrongs." If
"accidents,'' questions arise as to where the costs of such accidents should
ultimately fall and how the costs may most appropriately be met. If "wrongs,"
some appropriate form of redress through a legal proceeding must be sought.
To the degree that the injuries, viewed as side effects, can be minimized or
eliminated through further technological development or improved applica-
tions of existing technology, the remedies can be provided by engineers and
business management. To the degree that the injuries, viewed as ''accidents"
or "wrongs," can be prevented or compensated through action at appropriate
points in the legal system, remedies can be provided by law. Such remedial
actions through the legal system typically are perceived both by lawyers and
by engineers and businessmen as constraints imposed on technology and
business enterprise by law. In a larger view appropriate to the needs of the
contemporary society, it may be possible to perceive, design, and apply the
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74
MILTON KATZ
legal measures, along win technological and managerial improvements, as
alternative and mutually supporting ways to optimize the total effects i.e.,
the first-order effects and the side effects—of a technology and its supporting
system.
CONSTRAINING ASPECT OF LAW
The legal system in its constraining, aspect (i.e., in setting and defining
channels for economic activity) encompasses the general body of criminal
law and tort law; the antitrust laws and other measures to enforce competition
or to establish the plane on which competition is conducted; the regulation
of banking, the investment process, and the sale of securities; the control of
production, distribution, and pricing in such sectors of the economy as trans-
portation, electric power and light, communications, mining, the production
of oil and gas, and agriculture; and a variety of other measures. To keep this
inquiry in focus, it is necessary to examine the interfaces between technology
and economics and law in its constraining aspect through selective illustra-
tions. I believe it will serve our purposes to concentrate on the evolution of
substantive doctrine in tort law relating to negligence, nuisance, and strict
products liability; and on the procedures of fact-finding in law courts and
their implications. This will signify a concentration on judicial behavior and
common law development, with only tangential reference to the vast and
complicated web of statutes that pervades our national life.
I have chosen this emphasis for several reasons. Statutes are major sources
of law, but they are enacted by legislatures and as such fall within the political
process; and I have assumed that economists, engineers, and businessmen
are more familiar with the political process and hard realities of political
lobbying, pressure, and counterpressllre than with the judicial process. In
their day-to-day impact, statutes are profoundly affected by judicial inter-
pretation and application; and I have assumed that businessmen, engineers,
and economists often are as mystified by the interpretive aspect of judicial
behavior as by its other manifestations. In exploring negligence, nuisance,
strict products liability, and judical fact-f~nding in relation to economic and
technological activity, I shall apply Mr. Justice Holmes's well-known dictum
that in regard to such matters, a page of history is worth a volume of logic.
Tort Doctrine of Negligence Interface With Transportation
In 1871, He Central Iowa Railway was built to bring the power and speed
of railroad transportation to the farmlands of Iowa. The railroad crossed a
preexisting highway at an acute angle. In consequence, its trains ran very
close to the highway for some distance when approaching or leaving the
crossing. A local farmer was injured when the horse that he had been ndin:,,
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LEGAL SYSTEM'S ROLE IN lNNOvATION AND ECONOMIC GROWTH
175
frightened by the proximity of a train, shied and went out of control near
the intersection. The fanner brought suit against We company, charging it
with negligence in the construction of its railroad. Despite a jury finding in
a special verdict Mat We railway company could have built its track so as to
avoid the acute angle of intersection, the court decided against the farmer
(Beatty v. Central Iowa Railway, 58 Iowa 242, 12 N.W. 332 (188211. The
court's opinion illuminated its conception of the appropriate balance among
. .
re event cntena:
The mere constructing of a railway in close proximity to a highway is not, in itself, an
act of negligence. Railways, if constructed at all, must of necessity, cross over highways
. . . railways cannot always approach highways at right angles; if they approach at very
acute angles, as they sometimes do, it is apparent that they must, of necessity, run for
some distance in close proximity to and almost parallel with them. The mere fact that
they so run, although it may render the use of the highway less safe, does not of itself
constitute negligence upon the part of the railway company. Such increase of danger is
necessarily incident to, and attendant upon, this improved mode of transportation. All
persons must accept the advantages of this mode of intercommunication with the danger
and inconveniences that necessarily attend it; the price of progress cannot be withheld.
[Emphasis added.]
In economic terms, the court left the cost of We injury to the fanner and
his horse where it had initially fallen, external to the railroad's income
statement. In legal terms, the court shaped We ton doctrine of negligence to
fit its premises derived from the experience, outlook, and priorities of the
contemporar, society. It assigned priority to "progress," defining "prog-
ress" specifically as "improved transportation" and generally as economic
grow th.
Negligence anal Nuisance interface With Environmental Protection
In passing from cases arising from traffic accidents to cases arising from
pollution and environmental damage, the law typically shifts its frame of
reference from the doctnne of negligence to a combination of the doctrine
of negligence and a variegated body of doctrine known as "nuisance." A
judgment of the Supreme Court of Rhode Island in 1934 exemplifies a judicial
doctrine that assigned an explicit priority to industrial production over en-
vironmental protection (Rose v. Socony Vacuum Corp., 54 R.I. 411, 173
A. 627 (193411. The plaintiff was a farmer whose land adjoined the site of
a large oil refinery and storage tank owned by the Socony Vacuum Corpo-
ration. The farmland and the refinery were separated by a public road. In
the course of the company's operations, the soil on which the refinery stood
became impregnated with petroleum and waste substances that were Gamed
by subterranean percolation under the road to the plaintiff's farm. The con-
tinuous seepage poisoned both the well that supplied drinking water to the
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MILTON KATZ
farmer and his family and a small stream used by the farmer to water his
pigs and chickens. Denied drinking water, and enraged by the death of his
livestock, the farmer brought suit against the Socony Vacuum Corporation,
grounding his claim for damages on a theory of private nuisance without any
allegation of negligence. The Supreme Court of Rhode Island met the issue
head on:
Defendants refinery is located at the head of Narragansett Bay, a natural waterway
for commerce. This plant is situated in the heart of a region highly developed indusmally.
Here it prepares for use and distributes a product which has become one of the prime
necessities of modem life. It Is an unavoidable incident of the growth of population and
its segregation in restricted areas that individual rights recognized in a sparsely settled
State have to be surrendered for the benefit of the community as it develops and expands.
[Emphasis added.] If, in the process of refining petroleum, injury is occasioned to those
in the vicinity, not through negligence or lack of skill or the invasion of a recognized
legal right. but by the contamination of percolating waters whose courses are not known,
we think that public policy justifies the determination that such injury is damnum absque
injure [harm without a legal wrong].
Some 20 years later, in 1953, the Supreme Court of North Carolina ad-
judicated a conflict reminiscent of the controversy in Rose v. Socony Vacuum
Corp., weighing similar elements but with a different outcome. In Morgan
v. High Penn Oil Company (238 N.C. 185, 77 S.E.2d 682 (19531), the
alleged culprit was again an oil company, but the victim on this occasion
was the proprietor and operator of a restaurant and a Mailer camp. The
defendant oil company operated a refinery a thousand feet away from the
plaintiff s property. Complaining that the refinery emitted nauseating gases
that suffused his land as well as other properties up to a distance of two
miles from the refinery, the plaintiff brought an action for a private nuisance,
seeking both damages and an injunction. At the teal, the High Penn Oil
Company introduced evidence to demonstrate that its refinery was highly
modem in character and highly efficient, of a type generally used in the
industry for renovating used lubricating oils. The plaintiff made no attempt
to challenge the defendant's efficiency or the economic usefulness of its
operations. There was no intimation that He defendant was in any way
negligent. Nevertheless, He North Carolina court decided for the plaintiff,
insisting that the High Penn Oil Company "unreasonably" caused noxious
gases and odors "to escape onto the nine acres of He plaintiffs to such a
decree as to impair in a substantial manner the plaintiffs' use and enjoyment
of their land." This sufficed to entitle the plaintiffs to recover damages.
Since it was evident that the High Penn Oil Company also intended '`to
operate the oil refinery in the future in the same manner as in the past," it
was necessary to supplement the judgment for damages with an appropriate
injunction "to protect the plaintiffs against He threatened irreparable inju-
ries."
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LEGAL SYSTEM'S ROW IN INNOVATION ED ECONOMIC GROUCH
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How are the differences in judgment and the apparent differences in outlook
between the Norm Carolina court in Morgan v. High Penn Oil Company
and the Rhode Island court in Rose v. Socony Vacuum Corp. to be reconciled
and explained? In weighing the public interest in the refining of gasoline and
in the renovation of used lubricating oils against the public interest in pro-
tecting [arrnland against contaminated waters and protecting restaurants against
polluting gases, the two courts plainly struck different final balances. Courts
and judges have disagreed before in analogous cases, and the sources of
disagreement have been almost as varied as the complexity of the law and
the variety of the facts to which the law must be applied. The emergence of
a difference may, however, signify a new direction in judicial doctrine, to
be subsequently defined in successive decisions that settle into a trend.
I cannot in this chapter attempt to marshal evidence in sufficient volume and
detail to demonstrate the existence of such a judicial trend. I can and do avow
my opinion that in the balance of considerations Cat determine He outcome in
specific cases, a trend can be discerned in the development of the tort law of
negligence and of nuisance in He past half century, and especially in He past
three decades, toward an assignment of greater relative weight to such factors
as protection of the environment, safety in He workplace, safety on He high-
ways, and protection of He consumer and an assignment of less relative weight
to He facilitation of production and technological development.
The trend has been earned to a point where judges have incorporated their
own views of technology assessment into their legal opinions. In 1963, in
Renken v. Harvey Aluminum, Inc. (226 F. Supp. 169 (D. Ore. 1963~), He
United States District Court for Oregon adjudicated a dispute between fanners
in Wasco County, Oregon, and an aluminum reduction plant. Harvey Alu-
minum had constructed and operated its plant in accordance with the Defense
Production Act of 1950, as amended. The plant cost more Can $40 million
and produced some 80,000 tons of aluminum annually, sold both for general
industrial use and national defense purposes. The plaintiff, one of a number
of fruit growers in a fertile agricultural valley, complained that his fruit trees
and farmland were overlaid with deposits of "particles, part~culates, solids
and gases,'' especially fluorides, emitted by the defendant's plant and carried
by the wind to his property. Along with others, he sought an injunction. The
court's opinion, following the usual pattern of analysis in nuisance cases,
was nevertheless distinctive in con respects. It analyzed the physical
structure and chemical operations of the defendant's plant, with emphasis
on the apparatus of exhaust and fume control. It took explicit account of the
relation between the farmer's difficulties and the general problem of air
pollution. I quote:
[The evidence convinced the court] of the feasibility of the introduction of electrostatic
precipitators for the removal of the minute or small pariiculates which are not removed
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MILTON KATZ
by the other processes: . . . The great weight of the evidence points to the conclusion
that the installation of the cell hoods and the employment of electrostatic precipitators
would gready reduce, if not entirely eliminate, the escape of the excessive material now
darna~in;, the orchards of the plaintiffs.
While the cost of the installations of these additional controls will be a subst~r~iial sum,
the fact remains that effective controls must be exercised over the escape of these noxious
fumes. Such expenditures would not be so great as to substantially deprive defendant of
the use of its property. While we are not dealing win die public as such, we must
recognize that air pollution is one of the Meat problems now facing the Amencan public.
If necessary, the cost of installing adequate controls must be passed on to the ultimate
consumer. The heavy cost of corrective devices is no reason why plaintiff should stand
by and suffer substantial Carnage....
The court's statement that, if necessary, '`the cost of installing adequate
controls must be passed on to the ultimate consumer," indicates something
more Man the incorporation into He opinion of a judicial view of technology
assessment. It illustrates another trend in tort doctrine. In recent decades, an
increasing emphasis on social welfare objectives in tort law has tended to
shift the fulcrum of analysis from a concern wad the "fault" of the defendant
to a concern for compensation for We victim and a policy of distributing the
costs of accidents widely. Economists and businessmen may notice that the
court's opinion on its face does not reveal whether and how far the court
may have taken into account such factors as elasticity of demand and over
competitive conditions. Engineers on Weir part may have doubts concerning
the competence of judges for technology assessment in the endless variety
of industries that are drawn into litigation. If it should be assumed Mat the
necessary competence for relevant economic and technological judgments
can be supplied in the processes of litigation, questions might nevertheless
be raised concerning the factual basis for such judgments. Engineers, econ-
omists, and businessmen may be puzzled as to whether and how the pro-
cedures for fact-f~nding in a court of law can accommodate the kind of data
collection and analysis necessary for technology assessment and economic
judgments. These are questions that ~ shall examine later in this chaDrer
Strict Products Liability
---fir
The mend in the tort doctrines of negligence and nuisance has been matched
by a corresponding trend in the dockage of strict products liability. IN a
seminal decision of the Supreme Court of California in 1963 (Greenman v.
Yuba Power Products, Inc., 59 Cal.2d S7, 377 P.2d 897 (19631), Justice
Roger Traynor contributed an exemplary def~nii~on of the modern concept
of strict products liability:
The purpose of such [stnct products] liability is to insure that the costs of injures resulting
from defective products are borne by the manufacturers that put such products on the
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LEGAL SYS7EM'S RO~ IN INNOVATION ED ECONOMIC GROWTH
179
market rather than by the injured persons who are powerless to protect themselves....
To establish the manufacturer's liability it was sufficient that plaintiff [the ultimate con-
sumer] proved that he was injured while using the Shopsmith [a power tool] in a way it
was intended to be used as the result of a defect in design and manufacture of which
plaintiff was not aware that made the Shopsmith unsafe for its intended use.
The controlling factors are the existence of a "defect" which caused injury
to the ultimate consumer. No negligence need be established. In economic
terms, strict products liability is intended to "internalize" into the manu-
factunug process the cost of injuries to the ultimate purchasers by transfemng
the cost back to the manufacturer.
Justice Traynor's decision was one of several leading cases in a mend
vividly described by Judge (fo~erly Professor) Robert E. Keeton (1969:101~:
Decisions advancing this principle [stnct products liability] since 1963 have been described
as a tidal wave, a flood, and a prairie fire expressions that disclose . . . perhaps a
common ideological perspective of foreboding. Others. whose comments speak of the
same development but from a different ideological perspective, hale [sic; a breakthrough,
a new insight and . . . a new era.
The "defect" to which Justice Traynor's 1963 decision was addressed
was a failure of a lathe to hold a piece of wood, which flew out of Me
machine and struck the plaintiff on We forehead. The defects in over similar
cases were a faulty steering apparatus, a bad altimeter in an airplane, the
breakdown of a motor in ordinary use. These were manufacturing defects in
a familiar sense: the materials or workmanship of particular tools or instru-
ments fell below the level of quality justifiably expected by the purchasers.
The tidal wave described by Judge Keeton also carried along products
liability cases of another kind, in which the issues of fact were more subtle,
more difficult, and more troublesome in their implications for manufactunng.
These are cases involving a so-called "design defect," bet, a standard feature
of an entire line of tools or instruments adopted by the manufacturer as a
preferred design which the purchaser seeks to stigmatize as a "defect." In
such a case the existence of the condition is conceded. The issue is whether
it constitutes a "defect. " The Supreme Court of California has been assiduous
in protecting consumers from "design defects." Judge Tobnner, of Me Su-
preme Court of California, In a leading case (Barker v. Lull Engineenng
Co., 20 Ca1.3d 413, 573 P.2d 443 (1978~), summed up the determinative
. .
cntena:
[A] product is defective in design . . . if, in light of the relevant factors discussed below,
the benefits of the challenged design do not outweigh the risk of danger inherent in such
design.
[Iln evaluating the adequacy of a product's design . . . a jury may consider. among
other relevant factors, the gravity of the danger posed by Me challenged design, We
likelihood that such danger would occur, the mechanical feasibility of a safer alternative
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MILTON KA7Z
design, the financial cost of an improved design. and the adverse consequences to the
product am1 to the consumer that would result from art alternative design....
[Al manufacturer who seeks to escape liability for an injury . . . caused by its product's
design on a nsk-benefit theory should bear the burden of persuading the trier of fact that
its product should not be judged defective [on the basis of the ''relevant factors" de-
scnbed]. [Emphasis added.]
Do these criteria mean that We liability of a manufacturer will be deter-
mined by the way in which a jUIy may second-=uess a judgment made by a
manufacturer concerning the elements of risk and benefit in the design of
his product, the engineering feasibility of a safer alternative desk an, the cost-
benefit calculations relating to a possible improved design, and comparable
cntena? Operationally, the doctrine appears to mean just that. Its reach is
indicated in a 1978 decision by the Supreme Court of Oregon (Wilson v.
Piper Aircraft Coup., 282 Or. 61, 577 P.2d 1322 (197811.
Two passengers in a light plane manufactured by the Piper Aircraft Cor-
poration were killed when We plane crashed. Their wives brought an action
against Piper Aircraft Corporation, contendin, that the crash was caused by
carburetor icing and that a fuel-injection system would have eliminated the
danger of icing. This, they alleged, was a design defect. The Oregon court
responded to much Me same effect as the Supreme Court of California,
except Mat it left the burden of proof upon the plaintiff and acknowledged
somewhat greater concern for the possible consequences of its decision:
We are mindful of defendant's argument that a lay jury is not qualified to determine
technical questions of aeronautical design, and of the forceful argument by Professor
Henderson that problems of conscious product design choices are inherently unsuited to
determination by courts.... We do not underestimate the difficulties involved in this
type of litigation. We are, however, coITunitted to the position that members of the public
are entitled to compensation for their injuries if they are damaged because of improper
product design. ... In the absence of an ability to recover through courts, persons injured
by such designs would be without a remedy.
Plaintiffs' allegations amount to a contention that an airplane furnished with a standard
aircraft engine is defective because an engine of a different type, or with a different
carburetor system, would be safer in one particular....
There is not, however, any evidence about what effect the substitution of a fuel injected
engine in this airplane design would have had upon the airplane's cost, economy of
operation, maintenance, requirements' over-all performance, or safety in respects other
than susceptibility to icing....
Talcing into account all of Me evidence . . . we hold that the plaintiffs did not produce
sufficient evidence that a reasonably prudent manufacturer who was aware of the risks
of a carburetor icing would not have designed this model of aircraft with a carbureted
engine or that substitution of a fuel injected engine was practicable....
Although Me manufacturer escaped liability in the immediate case because
of the plaintiff's failure of proof, the court's words may well have continued
to ring ominously in his ears.
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Current litigation arising from injures caused by asbestos illuminates an-
other phase of strict products liability, referred to by lawyers as the `'state-
of-the-art" issue. In the courts of some states, the `' state-of-the-art defense"
Is regularly rejected. The meaning of the defense arid the consequences of
its acceptance or rejection can be traced in a recent decision of the Supreme
Court of New Jersey, Beshada v. Johns-Manville Products Corporation (90
N.J. 191, 447 A.2d 539 (1982)).
In the Beshada case, a number of workers and survivors of deceased
workers claimed redress for injury or death allegedly caused by exposure to
asbestos over varying periods of time in the defendant companies' factories
and warehouses. When the companies invoked the state-of-the-art defense,
the court disallowed it In a revealing opinion:
. . . the state-of-the-art defense asserts that distributors of products can be held liable
only for injures resulting, from dangers that were scientifically discoverable at the time
the product was distributed. Defendants argue that the question of whether the product
can be made safer must be limited to consideration of the available technology at the
time the product was distributed. Liability would be absolute, defendants argue, if it
could be imposed on the basis of a subsequently discovered means to make the product
safer since technology will always be developing new ways to make products safer....
The most important inquiry, however, is whether imposition of liability for failure to
warn of daggers which were undiscoverable at the time of manufacture will advance the
goals and policies sought to be achieved by our strict liability rules. We believe that it
will.
[Explaining that the goals included risk-spreading and accident avoidance, the court
contimled:]
Defendants argue that this policy is not forwarded by imposition of liability for un-
knowable hazards. Since such hazards by definition are not predicted, the price of the
hazardous product will not be adjusted to reflect the costs of the injures it will produce.
Rather7 defendants state7 the cost ''will be borne by the public at large and reflected in
a Renewal, across-the-board increase in premiums to compensate for unanticipated results.77
There is some truth in this assertion but it is not a bad result....
[Since the manufacturer is in the best position to take technological and managerial
steps to avoid accidents the burden should properly be placed on him.] Defendants urge
that this argument has no force as to hazards which by definition were undiscoverable. . . .
But this view ignores Me important role of industry in product safety research. The "state-
of-the-art" at a given time is partly determined by how much industry invests in safety
research. By imposing on manufacturers the costs of failure to discover hazards, we
create an incentive for them to invest more actively in safety research....
. . . We impose strict liability because it is unfair for the distributors of a defective
product not to compensate its victims. As between these innocent victums and the dis-
tnbutors, it is the distributors and the public which consumes their products which
should bear the unforeseen costs of the product.
Here is a judicially developed doctrine directed toward objectives that are
in a measure analogous to the purposes of workmen's compensation. Victims
of industrial accidents are to be compensated without regard to questions of
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MILTON KAIZ
intention or negligence; and the costs of compensation, imposed initially on
the manufacturer, are to be distributed widely through the society by the
price mechanism and, if the manufacturer so chooses, through insurance
purchased by him. The court also seeks, through the threat of potential tort
liability, to stimulate manufacturers toward increased research on product
safety in order to avoid or reduce industrial accidents. These are the explicit
judicial aims. One can also discern in the doctrine an unspoken but implicit
confidence in the capacity of America's industry and technology to promote
economic growth, productivity, technological innovation, and international
competitiveness with undiminished vigor while carrying the new judicially
imposed burdens. Businessmen, engineers, and economists may or may not
share this confidence.
Judicial Fact-Finding
The misgivings engendered in engineers and businessmen by recent trends
in tort law have been enhanced on occasion by their encounters with the
procedures of judicial fact-finding. When a businessman, engineer, or econ-
omist experiences these procedures, whether as plaintiff or defendant or
expert witness, he is apt to find them a fertile source of misunderstanding
and exasperation. The confusion arises from the multiple meanings latent in
the concept of a "fact" and a "finding of fact," and from the tensions that
can be generated by attempts to mesh one meaning of a finding of fact into
another, especially when the participants are unaware of the differences.
Let me suggest that you review in your minds what a fact means to an
engineer or economist. I ask you especially to contemplate the processes by
which an engineer or economist arrives at a finding of fact and the criteria
assumed to be applicable to the processes. To widen our perspective, I ask
you now to review in similar terms what a fact means operationally to a
physicist or chemist; to a paleontologist or a prehistoric archeologist in the
course of research; to a historian in the regular course of work; to a newspaper
reporter or to his or her managing editor; and to a businessman facing Be
need to make a particular decision or to foul ate a general policy for the
conduct of his enterprise on the basis of the relevant "facts." From such a
comparative appraisal, it appears that a fact is the final result of a process
of inquiry that varies from profession to profession and occupation to oc-
cupation; that the nature of a fact varies correspondingly; and that each
t Two years later, the Supreme Court of New Jersey sharply qualified this decision, holding that
the requirement of a warning by a manufacturer must be measured by whether the manufacturer
knew, or should have known, of the danger, given the scientific. technological, and other information
available when its product was distributed. Technically. the court refrained from overruling the
Beshada case, but ''restnct~ed] Beshada tO the circumstances giving rise to its holding'' (Feldman
v. Lederle Laboratories. 97 N.J. 429. 479 A.2d 374 (1984)).
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183
profession or occupation discusses its facts without explicit recognition of
their special meaning derived from the fact-finding processes typical of the
particular profession or occupation, because those processes are taken for
granted.
In a court of law, facts are found by a jury or a trial judge sitting without
a jury. The jury's findings must be based on evidence elicited from witnesses
through examination and cross-examination by trial counsel. Some proffered
testimony is excluded under rules of evidence derived in part from consid-
erations of logic, in part from technical considerations of judicial organization
and practice, and in part from considerations of policy rooted in historical
experience. When trial counsel complete their introduction of evidence, that
evidence is sifted by a jury in seclusion in accordance with instructions
received from the trial judge. The jury's eventual finding of fact is based on
a "preponderance of evidence" in a civil action or on "proof beyond a
reasonable doubt" in a criminal proceeding. These processes of fact-f~nding
have evolved to meet conditions, needs, and purposes with a meaning and
importance of their own. Apart from encrustations derived from history or
accident and maintained through habit, they can be and are accepted and
supported by responsible, experienced, and intelligent men and women as
essential to the general functions of the legal system. Nevertheless, they
cannot always readily be made congruous with fact-f~nding by engineers,
economists, scientists, or business executives. When businessmen, engi-
neers, or economists are involved in litigation, they must fry to fit their
concepts and methodologies of fact-finding into the concept and method of
the courts. They often find the fit to be neither natural nor easy, and tensions
arise. The frictions could perhaps be reduced and a better mutual accom-
modation could perhaps be achieved through a growing reciprocal apprec~-
ation of the nature and background of the respective concepts and methods
of fact-finding. How might an effort to foster an improved mutual under-
standing best be undertaken? A possible way to do so has been indicated by
the National Conference Group of Lawyers and Scientists, established jointly
by the American Association for the Advancement of Science and the Amer-
ican Bar Association in 1975 The National Conference Group has sponsored
a general Workshop on Cross-Education of Lawyers and Scientists and work-
shops on particular aspects of fact-finding, such as the assessment of tech-
nological risk. The need for such cross-education has been perceived, and
beginnings have been made at several law schools and engineering schools.
The need and the possibilities should be called to the attention of the engi-
neering schools, business schools, and law schools of the nation.
CONCLUSIONS
I have tried to show how the legal system not only constrains but also
facilitates and fosters business enterprise, technological innovation, and eco-
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MILTON KATZ
nomic thought. I have sought to outline a reciprocal relationship between
the constraints on technology and business prescribed by law and the burdens
imposed by technology and economic organization on law. I have identified
as a core problem the allocation of emphasis between the facilitating and
constraining functions of law. I have attempted to trace how the emphasis
has shifted from time to time, not only in legislation but also in the continuous
and pervasive work of the courts. Cases selected from an earlier period
demonstrated a judicial disposition to foster enterprise, technological inno-
vation, and investment even at the expense of acknowledged social costs and
risks. Cases selected from the period since We end of World War lI, and
notably from the 1960s and 1970s, demonstrated a shift in judicial emphasis
to a heightened concern for safety in the workplace and marketplace, en-
vironmental protection, and general social welfare, with a largely unspoken
assumption that technology and business enterprise can be adjusted to these
new pnonties without a serious burden on technological development, eco-
nomic growth, or international competitiveness. The constraints imposed on
business enterprise and technology by this shift in priorities have been com-
pounded by incongruities between the fact-finding processes of courts and
those of technology and business.
To understand the shifting judicial trends, we must project them against
the background of national events. The tendency to accord a decisive priority
to compensation for victims, widespread diffusion of We costs of compen-
sation through cost internalization, "accident avoidance," and environmental
protection emerged after World War II. The tendency became "a tidal wave,
a flood, and a prairie fire" or "a breakthrough, a new insight'' to borrow
Judge Keeton's vivid terminology in the 1960s and the 1970s. In the 1960s,
President Lyndon Johnson launched his antipoverty program and called on
the American people to join him in reshaping America into a "Great Soci-
ety." Social forces generated in the 1960s by President Johnson's program,
together with social forces independently generated to which We Johnson
program was in part a political response, gained momentum through We
1970s, producing a striking expansion of federal legislation aimed at envi-
ronmental protection, occupational safety, consumer protection, and general
social welfare. The new statutes applied not only to business enterprises, but
also to state and local school systems and other state and local government
officials, universities, foundations, the professions, political parties and can-
didates for elected office, and homeowners and automobile drivers. Whether
perceived as a '~prairie fire" or a magnificent `' breakthrough," We legislation
and the social outlook that it reflected became a part of our national life.
The effects, pervasive throughout the society, were infused into the thought
of lawyers and the judicial process.
I offer a view of certain elements in the changing national outlook which
I believe to have been critical for the interaction of law with economic growth
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FOAL SYSTEM'S ROI F IN INNOVATION AND ECONOMIC GROWTH
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lillLTON KATZ
toward a restored emphasis on production, productivity, technological in-
novation, and international competitiveness. If the trend continues, it will
make itself felt in the legislatures and the courts. There are indeed signs that
it may have already begun to do so.
One such sign is a Model Uniform Product Liability Act2 proposed by the
U.S. Department of Commerce (1977) for consideration and possible vol-
untary adoption by the several states, and based on extensive preliminary
study by a Federal Interagency Task Force on Product Liability and a sup-
plementary Options Paper, organized under the leadership of the Department
of Commerce at the request of the Office of Management and Budget and
the Domestic Policy staff of the White House. If the proposed Model Act
should be enacted by the states, it would introduce uniformity and add clarity
to the existing law and narrow the scope of potential liability of manufacturers
for design defects by basing liability on criteria essentially equivalent to
negligence.
Fifteen years ago, in an effort to assay the functions of tort liability in
technology assessment, ~ recommended (Katz, 1969) that:
The risk [unposed on manufacturers by tort law] should not be so great as to discourage
research, development, or investment in new technology. It should be large enough,
however, to impel industrial enterprises to take account of total systems effects in their
research and development. They should be stimulated to apply the resources of science
and technology to He elimination of harmful side effects as well as the achievement of
Be desired initial objective.
In what measure is the foregoing paragraph appropriate to the current
posture of tort law? In what measure is it appropriate not only to tort law,
which we have examined for illustrative purposes, but more generally for
the role of the legal system in technological innovation and economic
growth? In my judgment, it remains valid in essence but requires an
adjustment in emphasis. The adjustment in emphasis would be subtle but
critical, reflected in a shift in the order of statement. The current objective
should be to promote economic growth, technological innovation, pro-
ductivity, and international competitiveness while protecting consumers,
workers, and the environment from the harmful side effects of technology
and industrial indifference or mismanagement. The objective should be
pursued in the endless variety of particular applications of law, eng~-
peering, economic policy, and business management. This would reflect
the appropriate interplay between the two central and continuing historic
themes of growth and social equity in the contemporary national and
international setting.
244 F.R. 62714 (Oct. 31, 1979). See also footnote 1 in this chapter.
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FOAL SYSTEM'S RO~ IN INNOVATION ED ECONOMIC GROW
RELATED ISSUES
187
I now turn to three additional law-related questions. Let me comment first
on the apparently disproportionate number of lawyers and disproportionate
volume and intensity of litigation in the United States as compared with
Western Europe and Japan. Comparative statistics on such matters are no-
toriously difficult to put together on a reliable basis. Nevertheless, ~ shall
proceed on the assumption that the familiar data can be taken as reliable. I
suggest several factors that may contribute to a possible explanation. First,
Were is constitutional review under the U.S. Constitution which opens up a
range of litigation that has not been available historically in Western Europe
or Japan. Although recent constitutional changes in Japan and West Germany
may in time introduce something comparable in those societies, the data on
such a possible development are not yet in and the scale in any event would
be much more limited than in the United States. Second, the constitutional
factor in the United States has increased litigation not only by adding an
extra tier of judicial scrutiny, but by a specific mandate. ~ refer to the Supreme
Court's decisions that have compelled the states and Me federal government
to provide counsel to indigents who might otherwise have been unable to
appeal from decisions in lower courts or even to litigate at all. (Gideon v.
Wainwnght, 372 U.S. 335 (19631; Douglas v. California, 372 U.S. 353
(1963~; Argersinger v. Hamlen, 407 U.S. 25 (1972~; Scott v. Illinois, 99
S.Ct. 1158 (19791; and Evitts v. Lucey, 105 S.Ct. 830 (19851.) Congress
supplemented the Must of these Supreme Court decisions when it created
We Legal Services Corporation to provide general legal assistance to ~ndi-
gents. Third, you will recall that DeTocqueville in his Democracy in America
not only stressed the role of lawyers in Amencan life but commented also
on the absence of what he called an "a(lminis~ation," meaning a bureaucracy
or civil service. He pointed out Hat many matters which in Europe were
handled regularly and decisively by He "adrnimstrat~on" were handled in
America by individuals, groups, or voluntary associations that dealt with
such matters on their own independent initiative. When these individuals or
groups differed, they turned to the courts for resolution of their controversies.
In my judgment, DeTocqueville's observations remain valid today. Much of
our litigation is a price we pay for our comparative freedom from a pervasive
and authoritative bureaucracy of He kind generally accepted by He peoples
of Western Europe and Japan. Founds, in any national comparison of the
numbers of lawyers, account must be taken of the Amencan federal structure,
under which the American legal profession consists of 50 separate organized
bars, one for each of He 50 states.
Let me turn to He implications for technological innovation and economic
growth of current developments in He administration of He antirust laws.
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MILTON KATZ
Many of you are aware of the National Cooperative Research Act of 1984
(P.L. 98~62, 98 Stat. 1815), a statute designed to facilitate joint ventures
in research and development by American corporations. In essence, the
statute contemplates Mat no such joint venture should be pronounced illegal
by a court without full consideration of the procompetitive benefits of such
a venture. In addition, even if such a venture should be found on its facts
to be more anticompetitive than procompet~tive and therefore illegal, the
participants would be exposed only to actual damages and not to triple
damages. Perhaps this statute is additional evidence of a current trend in the
legal system toward a restored emphasis on productivity, technological in-
novation, economic growth, and international competitiveness. But beyond
this statute, the antitrust prospects are not yet clear.
~ turn to the current and prospective interaction between the law of intel-
lectual property and the accelerating expansion and development of infor-
mation technology and the infonnahon industry. For the past two years,
Professor Anthony Oethuger at Harvard University has been working on a
book which will include, as ~ understand it, a section devoted to this range
of questions. Several law schools have under consideration plans for the
development of new institutes of research and advanced training relating to
such questions as computer law, made secrets, and the law relating to genetic
engineering and biogenetics, aerospace, and medical technology. At another
law school, plans are under way to launch a new journal on information law
Mat win address these and other similar problems. These are signs that Me
world of scholarship relating to information technology and applicable law
has begun to take notice of Me changing situation and its possible portents.
On a recent article in the new journal, Issues in Science and Technology,
published under the auspices of He National Academies of Sciences and
Engineenng and the Institute of Medicine, a former assistant attorney general
in He Justice Deparunent's Antitrust Division deplores the failure of Congress
to take action to modify the present state of the law concerning the antitrust
implications of patent licensing (Baxter, 1985:80~. The author believes that
it is in the interest of technological innovation and economic growth to accord
to the owners of patents and other forms of intellectual property greater
flexibility in licensing in order to put Heir patents or other forms of intellectual
property to productive use. He believes that currently Hey are unnecessarily
inhibited by an unwarranted judicial hostility toward such flexibility. A bill
to rectify this situation was introduced but it was not adopted, for reasons
which, in He opinion of the au~or, reflect the unwillingness of congressmen
to take political risks in an election year. He concludes his essay by observing
Hat the "relationship between intellectual property rights and antitrust en-
forcement remains a problem that demands prompt attention" (Ibid., p. 911.
In sum, this is another area in which it is contently too early to discern what
new developments there may be.
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LEGAL SYSTEM'S ROT F IN INNOVATION AND ECONOMIC GROWTH
189
Although we cannot yet discern clear trends, current issues in these sectors
of statutory law, as in the common law of torts, reflect Me need for an
adjustment in emphasis in the contemporary phase of We historic interplay
between the theme of growth-innovanon-productivity-internaiional compet-
ihveness and the theme of social equity-inalienable nghts.
REFERENCES
Baxter, William F. 1985 Antitrust law and technological innovation. Issues in Science and Tech-
nology 1(2):80.
Katz, Milton. 1969. The [unction of tort liability in technology assessment. Cincinnati Law Review
38:587, 662.
Keeton, Robert E. 1969. Venturing To Do Justice. Cambndge, Mass.: Harvard University Press.
National Academy of Engineenng. 1969. A Study of Technology Assessment. A Report to the
Committee on Science and Astronautics, U.S. House of Representatives. Washington, D.C.
National Academy of Sciences. 1969. Technology: Processes of Assessment and Choice. A Report
to the Committee on Science and Astronautics, U.S. House of Representatives. Washington, D.C.
U.S. Congress. 1967. Technology Assessment Seminar. Proceedings before He Subcommittee on
Science, Research and Development of the House Committee on Science and Astronautics, 90th
Cong., 1st sees., Sept. 21-22.
U.S. Department of Commerce. 1977. Interagency Task Force on Product Liability. Final Report.
Report No. 273-220. Springfield, Va.: National Technical Infonnation Service.
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Representative terms from entire chapter:
supreme court
