B. The Market Consequences of Product Liability Litigation

What are the consequences of this product liability litigation explosion? How do businesses react to the unpredictable quilt of jury decisions and changes in remedy entitlement law? What actions do they take (or refuse to take) in order to come to terms with ever-growing case filings and damage awards? It is in answering these questions that the real significance of the contemporary litigation system becomes clear. At that point, it is no longer just a question of cost to a particular company, but also an issue of substantial impact on the very nature of doing business for all businesses. The impact is felt at the most fundamental level, in terms of what products to produce, how many of those products to produce, what kind of safety features to employ, what standard of technology to make use of, what price to charge the consumer, and what number of employees to maintain.

If the production of a consumer product creates a substantial risk that product liability settlements and jury verdict losses might be so high that they wipe out profit on the product, the product will not be produced, no matter how beneficial the product may be to millions of consumers. If the avoidance of product liability risk necessitates the incorporation of expensive safety features, the cost of the product will be marked substantially higher, even if the product then becomes out of reach to millions of potential consumers. If research and development will put you at an evidentiary disadvantage should the product be involved in personal injuries, then research and development will be avoided, even if the result is less long-term safety for millions of consumers. The list can go on and on, theoretically leading to that point in time when all production ceases.

Such a pattern of business reticence strikes at the very heart of the free market. It constricts the creativity and freedom of the entrepreneur, saps the ability of market prices to act as a competitive tool within the economy, and severely limits the options and opportunities of the employee/consumer. In exchange for a system of liability without fault, where any individual can recover sizable damages under numerous theories of recovery, society as a whole is forced to live with less choice, less creativity, less opportunity.

Product liability has become a pervasive fact of business life in the American economy. In a 1988 survey of 500 Chief Executive Officers by The Conference Board [15], product liability proved to be a prominent player in the corporate boardroom, perceived as stifling their production, innovation and competition. Four out of ten CEO's found that the product liability system was having a major impact on their companies, affecting how they plan and do business. Only 20 percent of the companies studied said that the product liability system was having a minimal impact on their particular companies. Most remarkably, one-third of the surveyed firms had canceled introduction of new products because of liability risks, with more than half of those reporting a major impact having discontinued one or more product lines. The survey uncovered particular unease with the uncertainty of the product liability system. The chairman of one multinational company described product liability quite accurately as a "lottery with no consistency."

Much of this uncertainty can be traced to the revolution in product liability law in the 1960's, when the law began to shift from standards of negligence toward the concept of strict liability. [16] As product liability law has since evolved, a jury can take any aspect of a product, whether that be Its operation, its design, or its packaging (including instructions and warnings) and find a "defect", thereby permitting imposition of liability. Wrongful conduct is no longer the issue, just the abstract concept of "defect" – might tile product have been safer, might the product have been differently designed so as to have avoided the particular injury in question, might the product have had different words of warning on the package which would have caused the immediate plaintiff to have acted differently? If the answer to the "might" question is yes, there is liability.

Liability can be imposed regardless of the product's age. Liability can be imposed even though the product might have the potential to injure only one person in a million. Liability can be imposed even if the product has been carefully tested and approved by experts under government authority. Liability can be imposed even if the injury is due to complete lack of care by the complaining party. Liability can be imposed even if the injury is caused by the wrongful acts of third parties or the plaintiff himself, such as with the alteration of the product or the removal of safety features. Is this a chapter out of "Alice in Wonderland"? No – it is the reality of modern day product liability law.

In such a world, research stops, innovation stops, products disappear, industries disappear. At the most fundamental level, progress in the manufacturing of products stops. For example, surveys of consulting engineers are now revealing a startling aversion to the development of new products. Old products are being favored over newer designs merely because of the greater risk of liability. In one survey of engineers, 63% responded that liability concerns were inhibiting their specification of new products. [17]

The list of examples of products no longer sold or never developed is growing rapidly in the current litigation environment. For example, the Monsanto company developed a phosphate fiber which is safer and possibly more effective than asbestos, but decided not to sell it or develop it further, because the company was not prepared to accept the potential liability risks, and in spite of the fact that its research showed the product to be safe. [18] Unison Industries Inc. of Rockford, Illinois, developed a solid-state electronic ignition system for piston-engine aircraft, but dropped the product after prototype testing. The company explained that it had been sued over crashes involving aircraft on which its products were not even installed, and the risk of selling the new product was too great, given the high cost of proving safety and seeking removal from spurious suits. [19]

Contraceptive research and development has been greatly impeded by product liability concerns. In the early 1970's, there were 13 pharmaceutical companies actively pursuing research in contraception and fertility. Now, only one U.S. company conducts contraceptive and fertility research. [20]Contraceptive research in the U.S., once a leader in the field, has plummeted 90 percent, and the stories of lost research and development opportunities are endless. For example, a new and effective IUD, the Copper-T 380A, was approved by the Food and Drug Administration, yet no major company was willing to market it for years after its approval. Only in 1987 was one very small company (going without liability insurance) willing to sell the IUD at a price vastly above the cost of manufacture. One observer noted, "a pharmaceutical company would have to be altruistic to the point of suicidal to market an IUD today." One pharmaceutical company president asked, "Who in his right mind would work on a product today that would be used by pregnant women?" [21]

Some of the most severe impact on research and innovation has come in the field of medical products and new medical technologies – a field the very aim of which is to aid the health of the public. Innovative new products that could help millions of individuals are not being developed or are being withheld from the market because of the liability risk. A survey of biotechnology companies revealed that over two-thirds of these companies consider product liability to be a central factor in the decision-making process on whether to proceed with commercial introduction of a product. [22] Such a decision-making process can have serious, if not devastating, impact on the health and safety of collective society.

A subsidiary of The Dow Chemical Company, Merrell-Dow Pharmaceuticals, produced a drug, Bendectin, which was given to 33 million women throughout the world to provide relief against debilitating morning sickness. A number of lawsuits alleged that Bendectin was responsible for birth defects. Despite winning all but four lawsuits (which are all on appeal), including one backed by 1,160 plaintiffs, the company withdrew the product from the market. As a result, millions of women and children are now subjected to significant health risk. [23] Faced with the enormous cost of defending more than 700 cases (which the company was confident it could have won), the company instead created a $120 million settlement fund. [24]

Vaccines have performed one of the most important medical contributions to public health in this century, yet vaccines have been particularly vulnerable to product liability law suits under the strict liability legal scheme. Vaccines have saved thousands of lives and reduced misery and suffering far millions, yet between 1965 and 1985, the number of U.S. vaccine manufacturers was reduced by half. By 1986, the nation depended on a single supplier for vaccines against polio, rubella, measles, Mumps, and rabies, and only two for whooping cough. Only two major companies, Merck and Lederle Labs, were still investing heavily in vaccine research. [25] Why? Because over the last 10 years, the number of liability suits filed against vaccine manufacturers has increased significantly. These suits have also resulted in vaccine price increases that greatly exceed the inflation rate. [26]

The manufacturer of a vaccine for Japanese encephalitis discontinued its distribution in this country because the risk was impossible to insure, thereby subjecting individuals traveling to the Asian continent to the risk of developing this serious disease. Says a report by the American Medical Association addressing the impact of product liability on new medical technologies, "(i)t would be a travesty to have product liability concerns adversely affect the continued development and utilization of this life saving technology." [27]

The lives of thousands of individuals are at stake because of the potential for a law suit by just one of them. The so-called "orphan drugs", which combat rare diseases, have become particularly hard to insure, and so are slipping from the market. The few hundred American children that suffer from cystinosis (a fatal kidney disease), tile 2,000 adults that suffer the motor function impairing disease of Charcot-Marie-Tooth, the 1000 persons who develop leprosy, and the victims of numerous other "orphan" diseases, may or are already being denied therapies and drugs and are being subjected to shortened lives or agonizing disability because any jury under current law can devastate the developer of that therapy or the manufacturer of that drug. [28] Is this the greater safety that the revolution in product liability law was supposed to bring about?

It would seem from the above evidence that the contrary is true – that safety is being limited by the growth of product liability litigation – and this is really only common sense. It is research and innovation that advances safety and health. Progress in the quality of products comes from development, and from the exploration of new ideas and opportunities. Yet the current product liability system represses this very stimulus for improvement. As Peter Huber, a senior fellow at the Manhattan Institute for Policy Research paints out in his pathbreaking book on litigation and liability:

No wonder the strong temptation today is to leave well enough alone in the hope that somehow the courts then will too. The pattern is consistent: a shift in the jury's focus from negligence to design defects; a legal obsession with perfectly phrased and endlessly detailed warnings; a rigid demand for universal, special-purpose accident insurance: the use of remedial efforts in the aftermath of an accident to indict whatever came before; and no effective time limit on litigation, so that even the normal pace of technological evolution becomes legally dangerous to the technologists. No one could have brought together five elements better calculated to entrench the status quo and scare off innovators of every description. [29]

Products of every kind are affected, from machine tools to appliances to automobiles. The high cost of product liability insurance, the expense of defending lawsuits (regardless of their merit), and the investment in risk prevention and minimization have caused at least 13.5% of machinery companies to drop product lines and at least 11.5% to decide against development of particular new products. [30] The Merchant's Corporation of America failed to market a new infant car seat, which they claimed would be the highest quality unit available, because of the potential liability risks. [31] The sporting industry has been particularly hard hit by the product liability lottery, since sports by their nature involve occasional injury. There are no longer any domestic producers of trampolines, inflatable balls or ice hockey equipment. [32]

The football helmet, the very purpose of which is to protect athletes from injury, may soon no longer be available. But for the availability of helmets made by foreign competitors, there might soon no longer be any football played, or at least no safely-played football. Rawlings Sporting Goods Company, a leading manufacturer of competitive football equipment for over 80 years, announced in 1988 that it would no longer manufacture or sell football helmets, despite having spent more than $1 million on research and development into football helmet improvements in the previous ten years. With that announcement, 18 of 20 domestic manufacturers had dropped out of the football helmet business. Can there be any wonder: there had been at least 25 helmet liability verdicts in U.S. courts since 1973, with jury awards totalling $46 million, and another 50 helmet liability cases in progress. [33]

The classic example of product liability taw progressively destroying an industry is in the field of aviation. In 1977, small-plane manufacturers paid $24 million dollars in liability claims; in 1985, their payout was $210 million. [34] In 1980, Beech Aircraft Corporation had eleven manufacturing plants; by 1987 they had only three (and those with curtailed operations). The main plant in Wichita, Kansas employed 7,600 workers in 1980; by 1987 there were only 4,900 employees. In Wichita, over 25,000 people have been laid off from their aviation industry jobs. Cessna Aircraft Co. laid off 900 employees in 1986 and halted production of its piston aircraft. Overall employment is down 70% in the aviation industry. In 1979 the aviation industry produced nearly 18,000 planes. By 1986, the number had decreased to less than 1,500. [35]

It is quite easy to understand why the aviation industry has been so severely impacted by the new product liability preference for the complaining individual. Because of the complex nature of an airplane, juries can virtually always find a "defect" somewhere and therefore impose liability. The more technologically advanced the product, the more difficult it becomes to protect that product from product liability.

This litany of technological regression, industry timidity, and product stagnation could go on, but the impact should be clear by now. The expansion of liability for products is having a devastating effect on the ability of the market to operate freely. Employers are no longer able to freely choose what products to make. They are no longer able to freely use rational considerations of quality, safety and price. Their profits are going into the payment of settlements, jury verdicts, and attorney fees, and the prospect of even more such expenditures is causing them to avoid the development of new products and the continuing production of perfectly safe existing products.

And what about the employee/consumer. Is he safer? Is he better off in the market place? Clearly, the answer is no. The employee is losing his job. His health and safety options are being narrowed. When he goes into the consumer market, he finds vital products no longer available, or at such high prices that he can no longer afford to buy them. The progress in product safety and utility that he had come to expect from our free market economy is no longer happening. In short, the free market is disappearing in a maze of lawsuits and industry fear,with society as a whole the clear loser.