What is the role of litigation in a free market economy? Litigation has certainly become a very expensive component of doing business, whether the cost be for insurance premiums or for self-insurance set-asides or for attorneys fees or for actual damage award payouts. Out-of-pocket litigation costs have become as common a factor in the calculation of business costs as advertising, overhead and basic labor costs. What purpose does this expensive system fulfill?

The purpose that comes to mind most immediately is conflict resolution. Litigation is the fault line of the economy, where conflicting claims are resolved. A mechanism must exist in society to arbitrate between conflicting claims, whether those conflicts arise between competing businesses or between an employer and his employee or between a manufacturer and his customers. This purpose of litigation is the most obvious.

But litigation does more than just resolve conflicts. Much more importantly, litigation shapes the behavior of market participants. In the establishment of rights and remedies, the legal system prescribes basic patterns of behavior. For example, a business obeys the criminal law in order to avoid prosecution. It avoids environmental pollution in order to escape government-imposed regulatory civil penalty. It negotiates with unions in particular ways in order to avoid unfair labor practice claims. It treats non-union employees in specific ways in order to avoid legal claims for reinstatement or back pay or distress damages.

Every time a new cause of action is established, whether by statutory law or expansion of the common law, the behavior of both the benefited and the regulated participants in the market is shaped accordingly. If you permit an employee to sue for wrongful discharge, you change the way employers treat their employees, and the way employees respond. Workplace rules change, communication between employers and their employees changes, the role of the union is refocused toward other aspects of the workplace life, etc. Theoretically, after the new law takes full effect, employers will no longer "wrongfully" discharge their employees, and litigation only comes into play in those rare instances when there is disagreement between the employer and the employee about whether a discharge has been wrongful.

Likewise, as you expand the ability to sue for injuries involving products, you change the nature and availability of those products. In theory (or so plaintiffs' attorneys will argue), products will be safer due to the expansion of product liability. More safeguards will be placed into the product design. More effective warnings will be given for use of the product. The best contemporary technology will be put to use in the composition of the product. If the product is unsafe, it will no longer be manufactured.

This behavior modification is the most critical and important aspect of litigation. Civil law and access to the courtroom are tools of behavioral manipulation just as much and just as effectively as any criminal or other regulatory edict of government. With one stroke of the pen, a judge can change the common law or reinterpret a statutory cause of action so as to fundamentally reshape the day-to-day behavior of millions of employers and their employees.

It is therefore a grave mistake to underestimate the power of litigation. It determines winners and losers on the battlefield of discretionary rights and intimidates the non-combatants into conforming behavior. Since it is economically wise to avoid the battlefield of litigation, a wise employer will make basic business decisions with the likelihood of exposure to litigation firmly in mind.

In analyzing the impact of the legal system on economic behavior, it is important to keep in mind not just the substance of the litigation (what is being litigated about), but also the amount of litigation (how easy it is to sustain an action in court). Since litigation constitutes an absolute additional, non-productive expense, attempts will always be made to either avoid it or minimize its impact. The easier it is for someone to sue you for a particular act, the more cautious you will become to avoid having someone claim that you committed such an act. If you are subjected to a lawsuit anyway, the longer the plaintiff has the ability to sustain the lawsuit, the more willing you will be to settle tile claim in order to avoid the legal expense and risk of a bad outcome. In short, the mere availability of litigation will produce more cautious behavior and willingness to incur settlement costs, regardless of the "rightfulness" or "wrongfulness" of your behavior or your product.

The behavioral impact of the legal system of rights arid remedies affects every aspect of every citizen's daily life. It determines where you work, what conditions you work under, what you work on, and what products you buy. The money that goes into litigation cannot be used for your wages and benefits. The employment position protected by legal entitlements cannot be opened up for your job application. The product made more expensive due to "safety" features or litigation-expense set-asides may no longer be affordable to you.

Does this mean that litigation is anti-"free market"? In one sense, the answer is yes. It certainly limits the right to choose. Without product liability law protection, the free market should still theoretically weed out the unsafe product, since consumers should carefully weigh safety with cost and buy the most efficient product for their needs. If a product is insufficiently safe, the consumer will simply switch to a superior competing product. Likewise, if an employer behaves unfairly toward his employees, a prospective job applicant will look to more fair employers. Without unjust discharge protections provided by law, employees may choose to seek out employers more willing to provide written contracts for employment protection (as is provided by the collective bargaining agreement). Litigation narrows this field of choice. It causes most products to be alike. It forces most employers to behave in similar ways. What was once choice instead becomes a dictate of law.

At the same time, we cannot go entirely without litigation. After all, we do not live in a society of perfect information, where all consumers know the merits of all products and all employees know the behavioral proclivities of ail employers. Everyone does not have equal power to make free choices. We live instead in a society with limited information and imperfect distribution of the power to make choices. In this less than perfect world, some people are so devoid of information and choice that society chooses to legally step in to help them. For example, looking at things very practically, we cannot permit severe injuries to persons who use clearly unsafe products just to protect freedom of choice. We cannot subject injured or unfairly treated workers to jobless economic impoverishment just to protect freedom of choice.

It is therefore necessary to strike a balance. Some rights of the individual employee/consumer must be established by law at the expense of employer discretion and collective freedom of choice in order to avoid undue harshness in our society. To some extent, the legal system must act as a tool of behavioral manipulation in order to satisfy our sense of justice. The question every society must ask is where to strike that balance. Since the world of litigation plays such an important role in establishing where the balance is struck, society must pay particular attention to what is happening in that world. If judicial decision-making is causing the balance to be struck too far in one direction or the other, the public must step in and redirect such decision-making, whether through a change in judicial membership, or through legislation, or through private efforts to redirect conflict resolution away from the courtroom. But as a first step, we must at least realize the critical role that litigation plays in the balancing process.