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Product liability reform: what happened to the crisis?

Product Liability Reform: What Happened to the Crisis?

Product liability was a major issue for American business during the late 1970s and throughout the 1980s. Millions of dollars were spent persuading lawmakers and the public that business could not proceed without some relief from what was characterized as unfair and unbalanced legal principles. As evidence, business cited the crushing weight of numerous lawsuits and large verdicts. The inability to obtain liability insurance was also blamed on inequities in the tort law. In Congress, bills were introduced repeatedly to create a uniform system of product liability law. None passed, and the prospects for future passage appear slim. By the end of the decade, news of the crisis had faded. The issue of product liability reform hardly garners a mention in the media, let alone the spotlight treatment it received in the ten years previous. How could such a widely publicized issue fade from the limelight in a relatively short period of time?

THE BACKGROUND

Crisis was the word used by industry and the media to describe the explosion of lawsuits and the shortage of liability insurance in the 1980s. The problems were particularly severe among manufacturers. For example, the National Association of Manufacturers noted, in a 1984 issue brief, that "virtually all studies concerning product liability laws have concluded that the problems are

many, [they] impede interstate commerce and, to some degree, they are harmful to America's competitiveness in domestic and international markets." Further, NAM noted that ". . . because the law in most states is judge-made, results may even vary from case-to-case within the same state. This situation amounts to a very complicated, tangled web of legal rules and standards. As a result, achievement of fair and equitable results is as unpredictable as the rules that guide them, and unnecessary costs are being generated."

At the time, industry advocated product liability reform at the federal level and, over the next few years, business pressure to do so increased. For example, NAM's message from a 1987 issue brief states, "the [product liability] crisis is escalating, not diminishing, every year." Further, in 1986 the White House Conference on Small Business ranked tort and product liability reform its number one legislative priority. Business groups had phone-ins, fly-ins, and other lobbying efforts to convince Congress to enact statutory product liability reform. It was clearly a critical issue for business.

In the early years of the product liability reform movement, business attempted to organize support for its position around the themes of predictability and fairness. In an attempt to gain predictability, business mobilized to seek uniformity through federal legislation. On the issue of fairness, specific provisions of legislative reform were advanced. One major initiative was to seek the modification of joint and several liability. This concept allows a party who is liable for any part of a claim to be liable for the whole claim if the other liable parties do not pay. Industry favored the adoption of several liability, which limits a party's damages to its own portion of responsibility for the harm. Additionally, manufacturers urged the adoption of other statutory reform measures, including eliminating double recoveries, restricting punitive damages, and enacting statutes of repose, to name a few.

In support of such provisions, industry offered rationales based on fairness. Eliminating double recoveries meant that damage awards would be reduced by the amount of workers' compensation, disability insurance, or other compensation an individual received for the same injury. In this way, injured parties would not be compensated twice. Punitive damages historically punished defendants for deliberate, knowledgeable wrongdoing. Product liability law, however, includes liability for less than intentional conduct. Awarding punitive damages for behavior that does not amount to malfeasance or wantonness is considered by some to be unreasonable and unfair. Statutes of repose provided an outer limit of liability for a product. After a specified time period, a product's useful life would be considered over and the consumer would assume all risks of using the product. The manufacturer could not be sued after the time limit expired and, therefore, could close the books on its liability exposure for that product. Industry believed it was unrealistic and unfair to expect products to have an unlimited life.

Early on, industry began to press lawmakers for these and other reforms. They were not successful in affecting change at the federal level and found only a few receptive audiences in state legislatures. For example, in 1986, 16 states modified the joint and several liability doctrine. On the surface, when more than 30 percent of the total number of states enacted this reform, it appeared to be a significant percentage, particularly when some of the most progressive and populous states, such as New York and California, were included. However, the modifications were not uniform and in some states contained numerous exemptions and special circumstances for which the modifications did not apply. Generally, medical malpractice and municipal liability received the most joint and several liability reform attention; product liability cases were specifically excluded in some states' reforms. Specific examples include the following:

* New York's reform applies only to defendants who are less than 50 percent liable and not to cases arising from motor vehicle accidents and many product liability actions, among others.

* California abolished joint and several liability, but only with respect to noneconomic damages.

* Illinois eliminated joint and several liability, but only for defendants less than 25 percent at fault, and excluded medical malpractice and environmental lawsuits.

A similar scenario unfolded regarding the elimination of double recoveries (the collateral source rule). Although 11 states enacted legislation in 1986 addressing the collateral source rule, some of these revisions required only that the court consider collateral benefits when determining the awards, or that dollar or percentage thresholds had to be met before the rule applied.

Statutes of repose may qualify as the most successful reform, as gauged by the number of states adopting the measure. Although nearly half of the states passed statutes of repose, there was no consistency among them. Time periods for running the statute, the event that began the running of the statute, and statutory exceptions all varied. To compound the variability, some statutes, such as Alabama's and Rhode Island's, did not withstand a subsequent constitutional challenge while others, such as Indiana's and Connecticut's statutes, did.

For punitive and noneconomic damages, the typical legislative reform was to place a statutory cap on the amount of damages that could be awarded, stated in dollars. As with statutes of repose, different states selected different dollar figures, and subsequent constitutional challenges have been successful in some states and not in others. Therefore, this reform compounded rather than minimized the variability in state law.

The inconsistencies of the state actions led to misleading indicators of how far tort reform had progressed. To say that 16 states modified the joint and several doctrine in 1986 is technically correct, and gives the impression that substantial inroads were made. However, the details behind these modifications, taking into account the exceptions and special circumstances required, leads one to the opposite conclusion. In addition, none of the aforementioned measures was adopted at the federal level, thus exacerbating the lack of uniformity. Each state could, and did, make its own accommodations to the product liability crisis. Some passed sweeping reform legislation, some passed one measure or a few, and some states retained the status quo.

COUNTING LAWSUITS

In the early to mid-1980s, two other events occurred that propelled tort reform into the limelight. The first was the publication of statistical studies that charted an increase in the number of lawsuits filed and the size of damages awarded in cases that went to trial. The second was an unexpected and sudden increase in liability insurance premiums, including instances in which no coverage was available.

The litigation studies were not necessarily undertaken as ammunition for the product liability debate, but they were nevertheless drafted into the controversy. They were offered to show the sorry state of tort litigation. Below are a few of the findings that caused policy makers to take notice:

* Average product liability awards increased 40 percent in Chicago and 300 percent in San Francisco from 1960 to 1984. Plaintiffs' chances of winning lawsuits also increased during the same period.

* Million-dollar plus awards increased.

* Average product liability jury verdicts increased from $393,580 in 1975 to $1,850,452 in 1985.

* Product liability suits in federal courts increased 758 percent from 1975 to 1985.

* Average punitive damage awards increased from $63,000 in 1970-74 to $489,000 in 1980-84.

It is no wonder that publication and citation of the studies caused the use of some dramatic terms to describe the state of tort law. Juries were said to have "run wild." The tort system was likened to a "lottery" or a "crap shoot." The increase in the number of lawsuits was termed an "explosion." And the word "crisis" was used over and over again to describe the various findings. Industry, riding the emotional outrage these findings caused, latched on to the studies as further evidence of the need to enact reform legislation.

As the claims about the number of lawsuits and size of verdicts became more extreme, others reviewed the methodology or attempted to replicate the studies to determine if they accurately portrayed the state of affairs in the tort system. A period of rebuttal followed and the predicate studies were questioned. No one claims that the studies intentionally misrepresented facts. Rather, the debate centered around methodology. Critics countered by questioning the applicability of the studies to other locations. For example, the studies featuring data from Cook County, Illinois and San Francisco, California focus on two metropolitan areas with commercial centers. As such, they may not be representative of the country as a whole. Some studies measured all civil suits or all tort suits and did not isolate product liability cases. Other critics observed that average awards are not sound ways of portraying the data because they can be distorted by a few very high awards. They recommended using the middle award, or median, to portray more accurately the growth of jury verdicts; and indeed, median awards of the data were often substantially lower than average awards. Still others objected to the use of federal court data to show product liability lawsuit trends. State courts are the more common homes for such cases and looking at federal courts gives a false picture, maintained critics. Most notably, federal courts were feeling the bulge of asbestos cases during the period measured. It may have given an inaccurate impression of the number of product liability lawsuits. One organization, The National Center for State Courts, finally stated categorically that there was no litigation explosion at all and that lawsuits were increasing in proportion to overall population increases.

Consequently, the battle of the experts waged on. We need only observe that the impact of the earlier studies was lost in the claims and counterclaims that followed. The sting of the numbers had been neutralized, at least a bit. As the conclusions of these studies were questioned, the evidence supporting the product liability reform movement became suspect.

THE INSURANCE CRISIS

The availability of liability insurance became another important factor in the quest for product liability reform. In the mid-1980s, liability insurance premiums rose drastically. In order to understand how this occurred, a brief explanation of the insurance industry is needed.

Insurance is a commodity, subject to supply and demand rules, and like any commodity, it can be in short supply. By regulation, the amount of insurance that a company can write is proportional to its capital and surplus (equity and retained earnings). In 1984, various state regulations required that insurance companies limit their ability to write policies in a ratio of 2:1 to 3:1 of premium dollars to capital and surplus. The insurance industry collects premium dollars that it invests to produce income. Investment income, in conjunction with premiums, offsets the expected losses on the policy and allows the industry to make a profit. Historically, in times of competitive pressures the industry has underpriced policies (underwriting premiums were lower than the expected payout) and relied on investment income to create positive income from the policy. In the early 1980s interest rates skyrocketed. This caused the insurance industry to drop their premiums to attract more business and receive more money, which could then be invested at high interest rates.

Then, as interest rates began to fall, the bubble burst. In 1984, underwriting losses exceeded investment income and premiums, resulting in an almost $4 billion loss for the insurance industry. This reduced the surplus and immediately reduced the amount of insurance the industry could write. Next, because underwriting losses were so high, premiums rose to reduce those losses. As a result, insurance companies quickly reached the legal ceiling for the amount of insurance they were allowed to write. Therefore, the industry's ability to write insurance dropped dramatically.

Some proponents of tort reform used the insurance crisis as further proof of a tort system gone wild, claiming that the liability exposure of business was so great that business could not purchase insurance. In doing so, the visibility of the product liability reform movement increased. Allied with the insurance industry and armed with data, business went to legislatures for relief. The original arguments of fairness and predictability had been sidelined for the opportunity to link product liability reform to the emerging, and certainly more dramatic, issues of the litigation explosion and the liability insurance crisis. However, as premiums rose and insurance companies began to show a profit, liability insurance became available again. Nothing had changed legislatively, leaving the cyclical nature of the industry, and not tort law, as the logical foundation of the crisis. As with the litigation explosion evidence, the causal connection between the problems of obtaining insurance and the need for product liability reform were weakened and became suspect, and the sense of urgency went out of the debate.

OTHER EVENTS

On a more subtle level, two other events may have helped end, or at least dampen, the product liability crisis. Both developments suggest that Congress is no longer the source from which to expect reform.

First, the content of proposed federal legislation has changed over time, due in part to new legislative leadership. Senator Robert Kasten (R-Wis.) is a steadfast supporter of federal product liability reform legislation and has sponsored most of the bills on that subject originating in the U.S. Senate. A review of the legislation he has proposed over the years reveals a trend away from a decidedly pro-business defendants' position. Earlier versions of Kasten-sponsored product liability legislation included provisions for caps on certain kinds of damages, defenses for compliance with industry and government standards, statutes of repose, the elimination of joint and several liability, restrictions on contingent fees, and many other provisions designed to reduce industry's exposure to liability. In contrast, his latest bill contains no caps, exacts only a few limitations on the awarding of punitive damages, establishes a 25-year statute of repose for capital goods only, and applies several liability only for noneconomic losses. When the Democrats regained control of the Senate in the 1986 elections, Senator Ernest Hollings of South Carolina became the Chairman of the Commerce, Science, and Transportation Committee. He is opposed to any product liability reform legislation, and his position, coupled with the failures of the earlier bills to achieve passage, means that any future legislation will probably not radically depart from existing law. Senator Kasten presumably knows which provisions have a chance at passage and which do not. The more moderate stance of his latest bill is indicative of political reality. The President has endorsed Kasten's bill after months of silence, but business does not appear ready to give more than perfunctory support to the much-watered-down blueprint for reform. The American Insurance Association, an ally of business in the early and mid-1980s, has refused to endorse this bill because, in the Association's judgment, the bill does not offer enough protection from product liability claims. It may be that whereas national rules make sense in national markets, this proposed federal legislation has yet to strike an acceptable balance of fairness and political palatability.

Second, two researchers recently documented that plaintiffs are actually winning less often in product liability lawsuits, suggesting that the tide has turned away from a pro-plaintiff stance. In what they term "the quiet revolution," Professors Henderson and Eisenberg of Cornell Law School report (1990) that since the mid-1980s, product liability cases have been benefiting defendants over plaintiffs and new case law developments during the period have been pro-defendant. If true, this could be another factor in ending the product liability crisis.

By analyzing published opinions in product liability cases from 1976 through 1988, the authors were able to calculate which party benefited from the decision, whether victory was determined as a matter of law, and whether the decision broke new legal ground. On every measure, the authors detected a swing away from the pro-plaintiff stance of the 1960s and 1970s. For example, in 1976 defendants benefited from a published opinion (largely from appellate courts, although the data base did include some federal district court opinions as well) in 51.2 percent of the cases studied. In 1983, the figure was about the same, although there had been a downward dip in between. After 1984 the trend consistently favored the defendant, reaching 63.4 percent by 1988.

Measuring victories as a matter of law is significant because, in those cases, the judge did not allow the case to go to jury for a factual determination of liability. Either because of a rule of law or insufficient proof, the judge handled the case on legal principles and determined that no fact finding by a jury was necessary to resolve the dispute. The trend from 1983 through 1988 was consistently upward in favor of defendants, moving from a 13.9 percent success rate to 26.7 percent. (The researchers controlled for the emerging state reform statutes that were being passed during the period.) The figures reported are exclusive of any opinions that would be compelled by a state statute.

Regarding ground-breaking decisions, the authors found that the rate for plaintiffs declined from 9.1 percent to 7.4 percent from 1984 to 1988. Over the same period, the rate for defendants increased from 4.8 percent to 7.9 percent, surpassing the plaintiffs' rate.

The authors also analyzed empirical data from federal district courts to determine plaintiffs' and defendants' success rates at the trial court level. Employing only federal court data raises the same concerns that it did in earlier studies; however, the authors believe that a larger percentage of product liability cases are filed in federal courts than other tort cases, and they remind the reader that federal courts apply state law in such cases. In 1979 plaintiffs prevailed in product liability cases at the rate of 40.5 percent. By 1987 that rate had fallen to 32.5 percent. The decline comports with trends spotted in the analysis of the decisional law. Finally, the authors reviewed the source of the decline in an effort to determine whether juries had given up awarding substantial verdicts frequently or whether a change in the law (other than legislation) compelled the shift. The findings reveal an increase in defendants' success rate at the pretrial motion stage. In 1979 defendants prevailed at pretrial at the rate of 4.4 percent. By 1984 the rate had climbed to 5.4 percent; it increased to 6 percent in 1985 and settled to about 5.5 percent in 1987. This tracks with the findings analyzing the published opinions and is evidence that the tide has turned in favor of defendants because of changes in the decisional law - not jurors' attitudes or law reform measures passed in the states. There are other possible explanations from some of the findings, and follow-up research must certainly be undertaken, just as with the earlier studies. However, if the numbers hold up under scrutiny, it will constitute empirical evidence that the need for product liability reform has diminished, or possibly ended.

An underlying concern about the state of product liability law has been that undeserving plaintiffs are able to achieve large recoveries. If manufacturers are actually experiencing clear wins in court and appellate decisions are providing definitive pro-defendant rulings on points of law that would be applicable in future cases, business's interest in seeking legislative reform is likely diminishing. Given these developments, and watered-down legislation that does not garner the unqualified support from the business community that earlier legislation did, the sense of urgency and need for immediate radical solutions to the tort system have diminished to a footnote.

FUTURE DIRECTIONS

What is the future of product liability reform? The questions of fairness and predictability have certainly not been settled. State law continues to vary on key points, even more so now that some inconsistent legislative reforms have been enacted. There have been no radical statutory departures from the way the case law fixes liability and compensation. The aforementioned provisions supported by industry to solve the crisis were not enacted at the federal level and only idiosyncratically in the states. If the issues were truly fairness and predictability of the law, product liability reform would still be in the limelight. But it is not, and that suggests three possibilities.

First, the fight may be lost. Various interest groups have had their chance to air the questions of who should be responsible for product-related harm and what the scope of that liability should be. Perhaps society has determined that the way the law assigns risk and compensates loss is satisfactory and thus is seeking no fundamental legislative changes. Kasten's recent bill may mirror what society, or at least policymakers, believe to be fair under the law.

Alternatively, because business moved away from the fairness and predictability arguments and allied itself with two issues whose legitimacy has been subsequently questioned (the litigation explosion and tort law's contribution to the liability insurance crisis), product liability reform became sidetracked. The price business paid for this alliance was its credibility. A legislator, after hearing for years that the tort crisis would escalate without legislative intervention, has to view similar arguments skeptically when the crisis diminishes without such intervention.

Third, perhaps sweeping legislative reform is not necessary. Judicious selection of issues, such as the management of mass tort cases or the applicability of government-sponsored product specifications to questions of liability, may be the next wave of tort reform. The focus is on discrete, manageable issues and not on the larger concept of product liability. The principle of who should be generally responsible for product-related injuries is not the main question. Rather, the strategy is to reform areas of the law that raise particular hardships. The opportunity to form large coalitions of manufacturers and associations may be lost, but so is the opportunity for the movement to become sidetracked by the personal agendas of one or more coalition members.

Perhaps the fairness and predictability arguments will reemerge as the focal points for a second round of debates. Although the credibility of business was damaged when the studies of the litigation explosion were questioned and insurance became available without corresponding changes in the law, the basic issues are still present. The challenge for business is to restore its credibility on product liability reform. Business must carefully document its liability costs, show how these costs affect decisions, and demonstrate what steps, if any, it has taken to make safer products. It cost is the issue, show why and how much. If fairness is the issue, state why. If maintaining competitiveness in world markets is the problem, provide empirical supporting data. Nothing will substitute for an honest and fair appraisal of the real situation confronting business, unencumbered by faddish topics.

Regardless of how the issue is handled in the future, business could be overlooking the fact that reform has already occurred. If the trends chartered by Henderson and Eisenberg are accurate, the course correction industry seeks may have already taken place - but in the judicial branch, not the legislative branch. Look for the decisional law to settle important issues such as the extent to which federal regulatory standards may preempt state product liability law and how to manage mass tort cases. Business has a role to play in shaping these and other issues, primarily as a defendant in a lawsuit. The past ten years have taught the lesson that expedient and trendy arguments do not carry the day. In fact, in our judgement, that strategy has caused business to lose the opportunity to shape legislative treatment of product liability law. The opportunity exists again - except this time within the courtroom, not the halls of Congress. If this is true, then future political strategy must change. The judicial branch cannot be lobbied in the same way a political body can. Business must become sensitive to a different environment, one that values documentation and monitoring over rhetoric and interest group politics. Linking product liability reform to issues and movements that have gained popularity has proved unsuccessful in the past, and is likely to fail in the future. Convenient alliances are no substitute for a thorough and rational debate over how society compensates losses caused by products.

References

Best's Aggregates and Averages - 1986 (Oldwick, N.J.: A.M. Best Co., Inc., 1986).

J. Henderson and T. Eisenberg, "The Quiet Revolution in Product Liability: An Empirical Study of Legal Change," UCLA Law Review, 37 (1990): 479-553.

Mark Peterson, Civil Juries in the 1980s (Santa Monica, Cal.: Rand Corporation, 1987).

Report of the Tort Policy Working Group on the Causes, Extent and Policy Implications of the Current Crisis in Insurance Availability and Affordability (Washington, D.C.: Tort Policy Working Group, 1986).

An Update on the Liability Crisis (Washington, D.C.: Tort Policy Working Group, 1987).

Frances E. Zollers is a professor of law and public policy, and Ronald G. Cook is a doctoral candidate, both at the Syracuse University School of Management, Syracuse, New York.
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Author:Zollers, Frances E.; Cook, Ronald G.
Publication:Business Horizons
Date:Sep 1, 1990
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