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

VICTOR E. SCHWARTZ

Many people view product liability law as a confusing morass of ever-changing rules. Tremendous uncertainties did mark the 1980s. Beginning in 1988, however, important stability returned to most of product liability law. Judges began to appreciate that expanding the liability system too far toward the plaintiff brings about adverse social consequences, such as the withdrawal of good products from the market and disincentives to innovation. One can use this new stability to help manage product liability risk.

To appreciate what stability there is and is not, one should focus on the fact that there are basically four ways to find a product defective: manufacturing defects, innocent misrepresentation or express warranty, design defects, and failure to warn.

If a company makes a product, and the product is different from its own specifications and hurts somebody, the company is liable. For example, if a jar of peanut butter has a piece of glass in it, that is a manufacturing defect. If a car's torsion bar does not perform within specified limits, that is also a manufacturing defect.

In this area, strict liability, which means that liability is imposed even though the manufacturer was not in any way at fault and which began in the United States in 1963,1 is really strict. There are some defenses, but they are predicated on rather unusual examples of user conduct, for example, total misuse of a product, such as driving a car across a river. This creates

a very strong argument for the importance of quality control, since breakdowns in quality control result in nearly inescapable liability for the manufacturers.

A second way a product can be found defective is through innocent misrepresentation or express warranty, in other words, what the manufacturer says about the product.2 If promises made about the safety of a product turn out to be untrue, even if they are not printed, the manufacturer can be held liable. A classic case happened in 1930 when an automobile company said that its glass would not shatter.3 The glass was hit extraordinarily hard by a rock at high speed, and the glass shattered and hit the driver. The company was liable for the injury.

Two subtle changes have occurred in this area since 1988. First, the law used to be universal that the person bringing the suit had to hear or see the words expressing the promise, and then believing them to be true, relied on them. This is called the reliance factor. The person who was injured by the glass had to see an advertisement from the automobile company that made him that promise. In many states that is no longer true, and it is enough that the representation was made.

That has real importance, especially in workplace liability. When a manufacturer sells a product to another company, it may make certain claims about a safety aspect of that product. If the employee of the company that purchased the product is injured, he can bring an action against the manufacturer, even though the promises of safety were made to his employer, not directly to him. In the past, the employee could not bring an action for this because the manufacturer had not talked directly to him, but now that has changed in some states.

This issue of liability resulting from making promises to one group about a product being used by another group is also tremendously important in the pharmaceutical industry. Pharmaceutical companies generally do not talk directly to patients; they talk to doctors or hospitals. They make promises about their products, sometimes significant ones, though not to the user.

The second change in the interpretation of express warranty concerns the specificity of what is said about the product.4 Formerly, the promises had to be very specific. There is a murkiness in the cases now so that statements that used to be regarded as simple exaggeration for promotional purposes—"This product is better than all the others" or "We have the safest one on the market"—may be used against the manufacturer in some jurisdictions.5

There are virtually no good defenses against a good express warranty

claim since the user presumed that the product could do what was promised.6 Neither the fault of the plaintiff, nor the fact that it was not scientifically possible to accomplish what was promised, is a defense. Tort reform will not change this other than to try to restore the reliance factor or to ensure that the promise has to be very specific. Because it is an area in which an increasing number of cases can be brought and won, it is important. The solution for the manufacturer is simply not to make the claims, either orally or in product literature or advertisements.

The third way a product can be found defective is in failure to warn. Experience has shown that this is an area where manufacturers are vulnerable. This is because no matter how explicit the warning is, it can always be said that there should have been additional warnings. Cases have also been brought against manufacturers who put warnings only in English where that was not the first language of many of the product's users.

There has been some tightening of the rules in this key area of liability. In the late 1980s, there were cases that suggested a manufacturer would have to warn about risks even if it had no knowledge that those risks could occur.7 In a 1991 case, however, the Supreme Court of California said that the state of the art, in the sense of what was knowable or could have been discovered, was a defense in a warning case.8 Legislatures in New Jersey, Maryland, and Louisiana have also corrected cases that have extended liability beyond what could have been known and closed off what could have become open-ended liability.9 In most states today, the law is that the state of the art is a defense in warning cases.

There are several things to keep in mind when writing warnings. The first rule is to get people's attention. Lettering, colors, and wording all come into play here. Second, in language that anybody can understand and in explicit terms, manufacturers have to explain the risk. If misusing the product is fatal, the user must be told. Third, and this is left out of many warnings, instructions must tell the user how to avoid the risk. With most products, there are ways to avoid risks and injuries, and if this is communicated well, the manufacturer should not be held liable.

Another cause of action under which liability has occasionally been imposed has been the "continuing duty to warn."10 This means if after a product is made the manufacturer discovers a new and significant risk, the courts say there is a duty upon the manufacturer to take reasonable steps to warn the owners. The warranty card that comes with most consumer products allows manufacturers to keep track of who owns that product. If something goes seriously wrong with the product, the manufacturer

should take reasonable steps to inform people about these newly discovered risks.11 If the manufacturer no longer makes the product, it does not have a duty to discover risks. Courts have mandated recall for very few products, mainly aircraft parts.12 So far, recall has been left largely to the regulatory agencies whose responsibility it is to oversee particular products.13

Design defects are the fourth way a company can be held liable for its products. To win these cases, the plaintiff must show the jury, in an understandable way, that there was a safer way to make the product. The Dalkon Shield litigation is an example of a case in which the plaintiffs' lawyers showed exactly what happened so that everybody on the jury understood it, and they demonstrated a feasible alternative design. If indeed there is a practical, economically feasible alternative design that would have increased safety, but it was not used, the manufacturer is going to be in trouble. In considering whether the alternative design is feasible, it is important to show that it would not bring about other, more serious risks.

State tort reform efforts are under way to make both warnings law and design law more explicit so that the rules become more understandable and fairer. The work is being conducted by the American Tort Reform Association (ATRA) and the American Legislative Exchange Council (ALEC), both based in Washington, D.C.

Why is legislation needed now, when it was not needed in the past? Fifty years ago, courts were very serious about following precedent ; however, over the past 25 years judges have engaged more in lawmaking, feeling it is their social duty to expand the rights of plaintiffs. This can have major impacts, for when the courts make a rule, it is retroactive, unlike rules that are developed by legislation.

In 1992 three states that are very different in their politics and geography—North Dakota, Mississippi, and Texas—have had successful tort reform efforts in the product liability area. In North Dakota the new law focused on punitive damages and limited them to two times the amount of compensatories or $250,000, whichever is greater.14 In Mississippi the law outlined the four basic ways product liability can be brought (as set forth in this paper). The law also changed punitive damage rules by raising the burden of proof to "clear and convincing" evidence and permitting a defendant

to have his punitive damage trial heard only if compensatory damages were awarded first.15 In Texas the principal reform was to require that plaintiffs in design cases prove that there was an alternative way to make the product.16

However, there is at least one jurisdiction where a court has reverted to a 1980s style of open-ended liability. In 1992 the Supreme Judicial Court of Massachusetts said in a footnote that manufacturers can be subject to liability regardless of whether they knew or could have known about a risk.17 In the past five years, when courts have gone as far as the Massachusetts judicial court, they have either made a self-correction and restored a "state-of-the-art" defense, or the legislature has overruled the decision.18 If this Massachusetts case is not corrected, it could be exported to other states.19 The law will dull innovation. It also may create chaos in the insurance industry, for if one has no idea what the risks are, how can they be insured against?

Tort reform at the federal level seems like it has been around as long as the pyramids, but unlike the pyramids it has changed. It has focused on product liability because products flow in interstate commerce. Enacting product liability tort reform at the federal level is difficult because those who are opposed to it are very strong politically in Washington. The product liability bills (S. 687 and H.R. 1910) of the 103rd Congress focus on punitive damages and joint liability. The Senate bill also includes reforms that would expedite claims and help injured persons with a discovery statute of limitations that would preserve claims until two years after a person discovered the injury and its cause.

One may ask which reforms will occur at the state level and which at the federal level. At this point, it seems likely that reforms dealing with design and the duty to warn will arise out of state tort reform. Overall reform of joint liability and punitive damages will occur at the state level, but to be totally effective it must occur at the federal level. There is new impetus and momentum behind the federal product liability bill; reform could come about within the next two years.

People often say that product liability law hurts the United States competitively. The quick response to that assertion is that a Japanese company selling a machine tool here is subject to the same liability laws as a U.S. company. One the other hand, U.S. companies tend to have more older

products in the U.S. marketplace than their foreign competitors. Since in most states a company can be liable for a product for an extraordinary length of time, those U.S. manufacturers face higher product liability costs, which are passed on in the price of goods. United States machine tools have been here more than 100 years; the Japanese and German versions have been here for considerably less time.

The Europeans tried to modernize their product liability law beginning with the European Community (EC) Directive, which began to be developed in 1979 and was published in 1985. There are some key areas in which their law differs from U.S. law. One is that they use a single definition of "defect." Under the EC Directive, "a product is defective when it does not provide the safety which a person is entitled to expect, taking all circumstances into account." This definition is very open-ended and provides much room for argumentation.

There are helpful defenses in the EC Directive. First, if a defect is due to compliance of the product with mandatory regulations issued by public authorities, there is no liability. That is not the law in most of the United States. For example, the fact that a company followed National Highway Traffic Safety Administration regulations can be introduced as evidence, but is not a defense. In Europe it is a defense, and there is much to be said for that if the agencies are doing their jobs. How can a jury of 12 second-guess what an agency has taken 12 years to decide?

Second, most countries that have adopted the EC Directive limit liability to known technical knowledge that was in existence at the time the product was put in circulation. In the United States, that "state-of-the-art" limitation is the law in every state except Massachusetts and Hawaii. It is not mandatory in the EC Directive; for example, Luxembourg has derogated from this defense, as have Germany and Spain with respect to pharmaceutical products only. However, most countries have followed this limitation on liability.

Third, a mandatory 10-year statute of repose for all goods begins on the date the manufacturer put the product into circulation, unless proceedings had already been instituted by the injured party. Although Texas passed a 15-year statute of repose for capital goods in 1992, most states have no repose period. Cases can be found involving products more than 90 years old!

There are other key differences between the European liability system and that of the United States. In Europe, damages for pain and suffering are limited; generally in the United States they are not. The United States awards punitive damages; most European countries do not. In Europe, judges rather than juries decide cases, and there are no contingent fees (lawyers are paid by the hour).

The overall trends in American product liability law have been toward making it more rational. Some respected observers have called this trend a ''quiet revolution."20 Although the revolution is not complete, the changes have made the job of those seeking to manage product liability more feasible. As companies and engineers work toward eliminating the potential for product liability lawsuits, the law itself may continue to embody more rational thought and reasoning. Although this may be more a hope than a reality at present, it is a goal worth working toward.