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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 instrumente.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 effectsof 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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176 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 177 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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178 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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180 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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r FOAL SYSTEM'S ROLE IN INNOVATION ED ECONOMIC GROWTH 181 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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182 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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r F GAL SYSTEM'S ROLE IN INNOVATION AND ECONOMIC GROWTH 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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1&4 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 185

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186 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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188 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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