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Innovation and our product liability system: let us end the conflict on incentives.

EVERY COMPANY has a "risk budget" for betting on the future. Innovation, research and development are a part of it. So are a company's investments, new marketing programs, and other initiatives they hope will pay off later. Increasingly, our country's legal liability system must be included in that risk budget too, because of the great uncertainty it imposes whether companies act responsibly or not. With today's liability system, the risk of paying out, not the chance of paying off, becomes an important factor on product decisions.

Courts are subjecting the makers of useful products and manufacturers who opt for improvements to the risk of severe sanctions, including large monetary awards. While they seek to provide compensation to plaintiffs, the ground rules are not always clear. To account for this liability in their "risk budgets," companies often are forced to scale back the risks they take on innovation by withdrawing safe and beneficial products and diverting resources that would otherwise go to promising research programs.

To some extent, innovation has become a tired word, but we should never stop holding it up as an important goal. American business and our nation will prosper only if we can maintain our position as a world leader in developing useful and desirable consumer products. Most American businesses work to achieve this goal, even when faced with a legal system that is not always in harmony with encouraging innovation and achievement.

Let me be clear on where I stand on those who knowingly make dangerous and defective products -- they should be subject to liability. The new European Community Product Liability Directive and product liability laws in many of our states fulfill that laudable purpose. What I am concerned about are impediments in our product liability system that have a contrary purpose and prevent companies from taking more risks on innovation. This article will briefly focus on several aspects of our legal system that stifle innovation and why they need to change.


Few realize that our product liability laws, generally speaking, are not made the way most law is made, that is, by legislators. Product liability law is created by courts. Court-created product liability law is a vestige of colonial times when our country adopted the English legal system of "common law." Under this system, judges develop rules on a case-by-case basis, while looking to prior cases as a guideline for their decisions. In many areas of our law, i.e., property and contracts, this common law system has been replaced by legislation. Again, generally speaking, this has not been true in product liability; only a few states have enacted product liability laws.(1)

The common law system worked well enough when judges gave strong consideration to what was done in the past. However, beginning in the 1970s and accelerating in the 1980s precedent became less important than the advancement of certain public policy goals. I realize that the advancement of public goals can be all well and good, but the focus of many courts was on one goal only -- providing plaintiffs with compensation.

Compensation is important, but it must be balanced by a consideration of what happens if everybody is compensated regardless of individual responsibility. One area where this was most blatant was the imposition of absolute liability on manufacturers, regardless of fault. This liability was imposed for failure to warn the user, even if a manufacturer neither knew nor could have known of a risk associated with its product.(2) It was also imposed on a manufacturer even if there was no other way to make a product. For example, an above-ground swimming pool cannot be made safe for divers.(3)

Fortunately, in very recent times, a few courts have seen the error of their ways in these areas and have given more consideration to the need for our country to innovate.(4) For example, the Supreme Court of California recognized the relationship between innovation and liability when it said that, "if a manufacturer could not count on limiting its liability to risks that were known or knowable at the time of manufacture or distribution, it would be discouraged from developing new and improved products for fear that later significant advances in scientific knowledge would increase its liability."(5)

However, the problem that has not abated is confusion. There are fifty state supreme courts issuing new product liability rules each year, all on a retroactive basis. These rules often conflict with each other. For example, some courts tell manufacturers to warn about obvious dangers, i.e., the glass breaks. Other courts suggest that this is not necessary, because warning about the obvious reduces the chance that user will pay attention to what is truly important. Human factors and communications experts agree with the latter point of view -- so do I. Unfortunately, the courts do not always accept sound social science as a basis for their decisions.(6)

Apart from the swirl of confusion, there are a few areas where some courts have formulated rules that work directly against innovation and hamper sound business practices. Let me cite several examples where basic economic common sense suggests that the law is simply going in the wrong direction.


Before the 1980s, most product liability cases involved traumatic injuries. A person lost a hand or a life because a product malfunctioned. There were no serious problems with causation -- everything happened in an instant. Beginning in the 1980s, however, a new type of liability arose, called "toxic torts." Here, someone was exposed to a product or substance many years before claims that a particular illness, i.e., cancer, was caused by that product. That kind of liability especially affects those who manufacture pharmaceuticals, medical devices, and chemicals.

Causation was not a simple matter anymore, and science needed to play a role. Some courts decided that it was good to ease a plaintiffs burden of proof by allowing causation to be proven merely on the say-so of an expert with credentials. A prime example of this involved the drug, Bendectin, made by Merrell Dow.

Bendectin is a drug that alleviated morning sickness. It is currently approved by the Food and Drug Administration and by other regulatory bodies around the world. Nevertheless, Bendectin is not available in the United States because Merrell Dow will not manufacture it, and no one has come forward with a substitute. This is why.

About a decade ago, some women who took Bendectin, and subsequently had children with birth defects, sued Merrell Dow. The mothers were particularly sympathetic plaintiffs. When it came to proof, however, they relied on experts who testified on the basis of their own credentials. By way of contrast, epidemiological data showed no correlation between the drug, Bendectin, and birth defects. A thousand women who took Bendectin and a thousand women who did not had about the same number of children with birth defects. Of equal importance, there was no particular "fingerprint" or pattern birth defect ever associated with Bendectin.

In the past five years, a number of courts declined to allow these cases to go forward. For these courts, it was not enough for an expert simply to allege that there was a connection between the product and the alleged harm.(7) Other courts, however, continue to allow unfounded expert testimony to create a bridge between the birth defects and the drug.(8) As long as these decisions linger, they serve as a deterrent to innovation by pharmaceutical and chemical manufacturers. No manufacturer wants to be held responsible for something it did not do.

This has become a case in point with the AIDS vaccine. Immune Response Systems, a small biotechnology company, has decided to halt its work on an AIDS vaccine because of concern about legal liabilities. With this vaccine, the area of particular concern is causation; companies simply cannot take the risk of being held responsible for a harm they did not cause.


Beginning in the late 1970s, courts confronted a new problem in product liability. A plaintiff's mother had used a drug called Diethylstilbestrol (DES), used to prevent miscarriages, and the plaintiff alleged a harm against the manufacturer. Other plaintiffs who later brought suit said they did not know which brand of DES their mother had taken, and consequently which company should pay damages. Courts that were sympathetic to plaintiffs decided that they did not have to show whose drug had been used. Instead, all the companies that made the drug could be sued and then damages would be divided by market share. The net result of all this was that a company that did not make the drug might have to pay the award.

The problem faced by courts in these cases was not an easy one. If someone has been hurt, and tried in good faith to identify who made the product and could not, there is some unfairness in saying that he or she should not have a claim. On the other hand, holding somebody liable when they did not make the product that was used is simply wrong. Courts are sharply divided about what to do. In California, where the lawsuits began, a defendant can avoid liability by showing that it did not make the product that hurt the plaintiff. Surprisingly, a little over a year ago, the highest court in New York, the New York Court of Appeals, ruled that a manufacturer that did not make the product, and could prove it, still would be held liable in proportion to its national market share.(9) Reform is needed because the current system, which is one of uncertainty, makes no economic sense.


A fundamental rule of law in almost every jurisdiction for over a hundred years was that, if a company improved its product, created innovations in its design, extended or made more explicit its warnings, or did anything else to improve its safety, this could not be used against the company with respect to its older, preinnovation products. In a dramatic case about a decade and a half ago, the California supreme court overturned this sensible rule. It held that a plaintiff's lawyer could show that a company improved its products in attempting to prove that an older product was unsafe.(10)

Since that time, a number of courts have agreed with the Supreme Court of California, and federal courts are divided on the subject. Having improvements used against you, perhaps more than any other liability rule, severely undermines day-to-day practical decisions to innovate and enhance safety. These rulings have their most dramatic effect in the absence of any lawsuits involving a product. If, indeed, the product is changed or warnings are added, and a problem then arises with an older product, the company knows that it courts a liability disaster. The incentive works against taking that extra step and making the improvement.

Some might say that data and surveys are necessary to prove that these are major problems. Such surveys exist, but I suggest that common economic sense amply demonstrates the logic of these disincentives. Manufacturers hesitate to give examples of decisions not to make improvements, fearing that these explanations will be used against them. What is needed is reforms to restore the traditional rule that improvements in the safety of a company's product cannot be turned around and used against it. We need a national, uniform, clear position. Let us make incentives for safety work with the law.


When more than one person combines to cause a harm, the law in many states holds each of them jointly liable. Plain and simple, this means that someone who may be 5- or 10-percent responsible has to pay 100 percent of the damages.

When a company plans a new product, it is difficult enough to estimate liability that could befall it for its own conduct, wrongful or otherwise, and account for the risk. It is virtually impossible to estimate liability that might be brought about because some other company, person, or group that might be involved with the product could cause harm. Nevertheless, just such an estimation is required by joint liability. Fortunately, over thirty states have limited joint liability, and proposals before Congress, H.R. 3030 and S.640, The Product Liability Fairness Act, would limit joint liability to economic losses in all states. The approach before Congress is fair because it allows states to retain joint liability for economic losses, the out-of-pocket costs that the plaintiff had to suffer. But, it eliminates joint liability for the amorphous uncertain part of damages, damages for pain and suffering. This makes economic common sense.


Based on practical experience in the marketplace, businesses face obstacles in the current American legal system that deter good innovation and sound manufacturing practices. In a nutshell, the old common law system of retroactive judicial lawmaking within each state does not work in the current world. Manufacturers need to know the rules if they are to make their product safe. Otherwise, instead of taking risks in innovation, they will be forced to continue accounting for courtroom uncertainties in their risk budgets.

Manufacturers should clearly be held liable if defective products cause a harm, but they should not be responsible for things they did not cause. Unfortunately, that result can occur too often because of loose rules on proof of causation, judges' over-sympathetic response to people who cannot identify who made a product, and joint liability.

Finally, responsible innovation and change should be encouraged by the law, not used as a weapon against those who seek better products. If the few areas discussed in this article can be altered and made unform, it will go a long way toward ending the conflict of incentives and make product liability law work for growth and development that is both safe and sound.


1 See N.J. Stat. Ann. |sec~ 2A:58C-7 (West 1987) (New Jersey); La. R. S. 2800.51 et seq. (Louisiana); Ohio Rev. Code Ann. |sec~|sec~ 2307.71-2307.80, 2315.20 (Page 1991) (Ohio); RCW 4.22.920(1) (Washington).

2 See, e.g., Avers v. Johnson & Johnson Baby Prods., 818 P-2d 1337 (Wash. 1991); Beshada v. Johns-Manville Prods. Corp., 447 A.2d 539 (N.J. 1982); Halphen v. Johns-Manville Sales Corp., 484 So. 2d 110 (La. 1986).

3 See O'Brien v. Muskin Corp., 463 A.2d 298 (N.J. 1983).

4 See V. Schwartz, The Death of "Super Strict Liability"; Common Sense Returns to Tort Law, 27 Gonzaga L. Rev. 179 (1991/92).

5 Anderson v. Owens-Corning Fiberglas Corp., 810 P.2d 549, 556 (Cal. 1991).

6 See V. Schwartz and R. Driver, Warnings in the Workplace: The Need For a Synthesis of Law and Communication Theory, 52 U. Cinn. L. Rev. 28 (1983).

7 See Brock v. Merrell Dow Pharmaceuticals, Inc., 874 F.2d 307, reh'g denied, 884 F.2d 167 (5th Cir. 1989); Richardson v. Richardson -- Merrell, Inc., 857 F.2d 823 (D.C. Cir. 1988), cert. denied, 493 U.S. 882 (1989); Thomas v. Hoffman -- La Roche, Inc., 731 F. Supp. 224, aff'd, 949 F.2d 806 (5th Cir.), reh'g denied, 957 F.2d 869 (5th Cir,), cert. denied, 112 S. Ct. 2304 (1992); Daubert v. Merrell Dow Pharmaceuticals, Inc., 727 F. Supp. 570 (S.D. Cal. 1989), aff'd, 951 F.2d 1128 (9th Cir. 1991); Turpin v. Merrell Dow Pharmaceuticals, 959 F.2d 1349 (6th Cir. 1992); Lee v, Richardson-Merrell Inc., 772 F. Supp. 1027 (W.D. Tenn. 1991), aff'd, 961 F.2d 1577 (6th Cir. 1992).

8 See Lanzet v. Greenberg, 594 A-2d 1309 (N.J. 1991) (allowed medical malpractice case to proceed based on expert opinion not sustained by facts or reasons); Havner v. Merrell Dow Pharmaceuticals Inc., Texas Dist. Ct., 214th Jud. Dist., (Oct. 3, 1991) (punitive verdict); Rubanick v. Witco Chemical Corp., 593 A.2d 733 (N.J. 1991).

9 See Hymnowitz v. Lilly & Co., 73 N.Y.2d 487 (N.Y.), cert. denied, 110 S. Ct. 350 (1989).

10 See Ault v. International Harvester Co., 528 P.2d 1148 (Cal 1974).
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Author:Schwartz, Victor E.
Publication:Business Economics
Date:Oct 1, 1992
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