HARNESSING THE AMERICAN MARKETPLACE / 57
Products Liability Reform
Jules L. Coleman
merican manufacturers continue to grapple with
The
impact of the current system for compensating consumers for harm done by manufactured goods extends far beyond such celebrated cases as those facing
cigarette manufacturers or asbestos suppliers. In
1985-1986, nearly half (47 percent) of all product
manufacturers in the U.S. removed product lines
form the market place, 25 percent discontinued
product research, and 39 percent decided against
introducing new products, all as the result of increased exposure to liability. These are striking
figures.
More importantly, in removing products already
on the market, manufacturers are responding to continuing changes in the rules governing liability for
their products - changes they obviously could not
predict in advance. For had the manufacturers been
able to predict that their products would be deemed
defective, they would either have altered the design
earlier or simply not produced the product in the first
place. Such radical changes in the availability of
product lines cannot be good thing for either
manuf~tcturers or consumers.
On the other hand, it is certainly not desirable that
dangerous products remain on the market. What is
undesirable about the current products liability system is its uncertainty. What the law will deem to be
d a n g e r o u s and h o w far it will c o n s i d e r the
manufacturer's responsibility to extend are far less
predictable than they should or could be.
It can come as no real surprise that two words
capture the American manufacturer's concerns
regarding products liability- exposure and uncertainty. T h e s e two concerns are connected. The
manufacturer's concern about exposure ranges over
A the costly problem of products liability.
both persons and time. To whom is a manufacturer
liable? How far in time does responsibility extend?
The Aviation Industry Example
Problems of exposure and time are nicely illustrated by the current crises in the aviation industry.
In 1979, the aviation industry produced more than
17,000 aircraft. In 1987, it shipped only 1,085 - a
decrease of more than 90 percent. Specifically,
Cessna, which produced 9,000 piston planes in 1979,
produced none in 1987; and Beech dropped from
1,214 in 1979 to 195 in 1987. Teledyne Continental,
a major engine manufacturer, saw its production drop
from 11,000 to 400 in the same period. These figures
do not represent a response to decreasing demand for
the products generally, since the differential is almost entirely accounted for by increased foreign
production- especially by West German companies.
Rather, it reflects increased costs that make American
products unattractive.
Product liability costs now constitute the largest
single cost factor in the construction of a new piston
engine aircraft. Industry officials allege that if actual
product liability costs were added as an average cost
per plane to each aircraft produced, it would increase
the cost by $100,000 per aircraft.
The increase in product liability costs does not
stem from increased accident rates. In fact, accident
rates have steadily declined. Rather, it stems from
the nature of product liability law itself. The problem
of exposure is reflected in the fact that even though
85 percent of all accidents are due to pilot error,
manufacturers are sued in well over 90 percent of
cases involving fatalities or serious injury. There are,
moreover, no caps on recovery, and no time limitations.
581 SOCIETY
9 NOVEMBER/DECEMBER
1989
The net result is that, while in 1977, the aviation
industry paid $24 million dollars in claims, in 1985,
it paid $210 million, though the number of suits
remained relatively constant. How did product
liability law come to wreak such havoc, and what can
be done to reform it?
What is Products Liability?
At one time, product liability law was really a
branch of the law of sales, risk was allocated by
contract, and a manufacturer's liability was restricted
by the doctrine o f privity to those individuals who
were the immediate purchasers o f its products. The
net effect of the doctrine ofprivity applied to products
was to insulate the product manufacturer from
liability to the ultimate users of its products. A
manufacturer's potential liability would extend in
time no longer than the period of ownership of the
immediate purchaser, and often a good deal less.
Such a rule restricting the scope of liability over
persons and time had two significant benefits for
product manufacturers. First, it reduced significantly
the costs of doing business. Many of the harms
causally connected to the manufacturing process
were not held to be the manufacturer's responsibility.
Instead they were extemalized, that is, imposed on
third parties. As a consequence, manufacturers were
not required to bear the full social costs of their
activities.
Second, the sales contract as a market mechanism
of risk allocation enforceable at law provided
manufacturers with a great deal o f certainty regarding
at least one central element of the costs of production.
With confidence and warrant, a manufacturer could
determine in advance his exposure to liability and
adjust his investments in safety accordingly.
The current problem is whether the rule of liability
for products can provide both the predictability for
rational investment in safety and the incentives
necessary for proper investment decisions. We have
come a long way from a standard that allowed predictability but encouraged underinvestment to the
present set of standards that magnifies uncertainty
and, in doing so, undermines possibilities for rational
investment in safety. The story of m o d e m products
liability law, then, is a tale of confused and failed
attempts to make this body of law at once rational and
predictable.
Modern Liability Law
It was obvious that the doctrine o f privity as applied to products could not survive. Such a law did
nothing to protect the ultimate users of products those very individuals for whom the products were
intended. The landmark case of MacPherson v.
Buick Motor Company is widely credited with
weakening the so-called privity limitation, thereby
removing product liability from the law of sales and
putting it within the law of tort.
Liability in tort is not restricted to those with whom
one has a contractual or business relationship. One
could think about the rules o f tort liability as those
goveming relationships among "strangers," those
with whom one is unconnected by contract.
The idea is simple enough. If two parties have a
contractual relationship, then if there are no laws
prohibiting them from doing so, the risks each bears
in case something fails to go as planned should be
settled in advance. The law can be viewed as providing a set of default rules that can be appealed to in the
event parties fail to agree, or which they might contract around if there is agreement on allocation of risk.
These private arrangements about risks and costs
can only be made when both parties are in a position
of contracting at low cost, and legal rights and duties
to one another are inexpensive to determine. Uncertainty will hamper bargaining or contracting even if
other transaction costs are low; and not being in a
position to contract at low cost makes contracting
around rules too expensive to be rational.
One might view the entire law o f torts as setting
out the rights and responsibilities we have to one
another as regards safety-related risks when our
relationships are fundamentally noncontractual,
when the costs of allocating risk by contract are too
high. For these rules to provide us with meaningful
incentives, they must be predictable. For them to
provide us with optimal incentives, they must be
rational.
The rejection of the sales contract as a vehicle for
allocating risk, therefore, rests on two assumptions.
The first assumption is that the costs of contracting,
of allocating risk by market forces, are too high; that,
in effect, the market will allocate product risk inefficiently. If we left the allocation of risk to manufacturers and consumers, we would either get far too
little or too much investment in safety. The usual
assumption is that we will get too little. The second
assumption is that substituting imposed tort standards
is more likely to lead to predictable, rational investments in safety.
Two questions naturally emerge. First, is the
move from the contract to the tort solution warranted?
Is there sufficient evidence that leaving risk alloca-
HARNESSING THE AM ERICAN MARKETPLACE / 59
tion decisions to the market will be inefficient?
Second, if courts were ultimately correct in abandoning contract for tort, has tort law provided the needed
rationality and predictability? Let us take up these
questions in reverse order.
The initial question to address in this respect is
whether in moving from the law of sales to the law
of torts, the courts have provided a body of liability
rules for products that is both predictable and rational.
Or is it, instead, a body of law, as the statistics on
product withdrawal suggest, that is unable to guide
manufacturers consistently about their legal responsibilities and which encourages sweeping and deep
confusion in product offerings?
The greatest danger to an insurance
market is radical uncertainty - precisely
what the current products liability
regime has given us
In tort law, a distinction is made between strict and
fault liability. When a rule of strict liability applies,
a defendant will be held liable if the plaintiff can
e s t a b l i s h a c a u s a l c o n n e c t i o n b e t w e e n the
defendant's conduct and the victim's harm. Under
negligence, the victim must establish not only a
causal connection between conduct and harm, but a
fault in the defendant's conduct as well. A person is
at fault in causing harm only if he does so either
intentionally, recklessly, or negligently. Accidents
are not intentional, and most of the law of accidents,
therefore, is devoted to negligent wrongdoing.
Negligence is failure to exercise the care of a
reasonable person of ordinary prudence.
What is Prudent Behavior?
E c o n o m i s t s have s u g g e s t e d that the care
reasonable persons should take can be given a precise
economic characterization. Assume, first of all, that
there is some probability of harm from a product and
that the costs to the potential victims are known as
well as the costs of preventing harm. If the costs of
preventing harm exceed the expected costs to the
potential victim (the costs to the person harmed multiplied by the likelihood of its occurrence), it would
not make economic sense to incur those prevention
costs. An agent who failed to make inveslments in
safety beyond the expected costs to the victim would
not be negligent.
Where the costs of prevention are less than the
expected costs of the harm, failure to take precautions
would constitute negligence. Failing to spend $200
to prevent an accident whose expected cost is $100 is
reasonable and, therefore, not negligent. Failing to
spend $50 to prevent the same accident would be
unreasonable and negligent. In the event harm results
from negligence so defined, the victim's losses would
be the injurer's fault, and he would be justifiably held
liable for them.
If an injurer is not required to take precautions
against unexpected harm, he is benefitted; that is, he
saves the costs of prevention. We might think of the
negligence test as a cost-benefit test. The injurer is
negligent if the expected costs of the harm exceed his
benefits from risking its occurrence. The test is social
in that the determination of whether the benefits
outweigh the expected costs is made by a public body,
usually a jury, sometimes a judge, and occasionally
an administrative or regulatory agency.
Strict Liability and Negligence
Under the standard of strict liability, an injurer will
be held liable - the victim's losses shifted to him whether or not he has acted negligently, whether or
not the costs of prevention exceed the expected costs
of the harm. This fact might lead one to think that, in
principle, a rule of strict liability will be harder on
potential injurers than would be a negligence rule. In
one sense, it is, but in another important sense, it is
not.
The strict liability rule, like its negligence counterpart, requires a cost-benefit calculation. Under strict
liability that calculation is made exclusively by
potential injurers, not by a public body, such as a
court.
If negligence is the standard, then its determination
requires a collective decision. That decision, in tum,
requires information including the injurer's schedule
of benefits and the victim's damage schedule. In
court, both parties, after the fact of the harm, have
incentives to misrepresent, to understate or to exaggerate the costs and benefits.
Under strict liability, an injurer already has special
access to his benefit schedule, thereby increasing the
likelihood of correct cost-benefit evaluations being
made. Since, under strict liability, the injurer will be
liable after the fact no matter what the cost-benefit
calculation is, the injurer is led to make the calculation before he or she engages in a risky activity.
Under both strict and fault liability, injurers are
motivated to invest in safety only when doing so is
60 1 S O C I E T Y
9 NOVEMBER/DECEMBER
1989
cost-justified. In that sense, strict liability is no harsher on injurers than is negligence. The difference
between the two, then, is that under fault liability,
when neither injurer nor victim is at fault, the loss
falls on the victim. In strict liability that loss becomes
the injurer's responsibility. In that sense strict
liability is harsher on injurers. With respect to safety
investments, both strict and fault liability impose the
proper incentive on manufacturers. They differ with
respect to the distribution of risk for injuries that are
in a suitable sense no one's fault.
Moving Toward Strict Liability
M o d e m product liability law is governed by a
mixture of strict and negligence liability. The standard of liability in Mac Pherson was negligence, and
it was not until the 1960s that strict liability came to
provide a basis for recovery. Like most developments in the law, the change from negligence to strict
liability was slow, and in a way tortured. The first
significant m o v e m e n t from negligence to strict
liability involved increasing reliance on the doctrine
of res ipso loquitor. Under that procedural rule, the
mere fact of an injury could be taken to be presumptive evidence of negligence. Rather than a consumer
having to show a manufacturer's negligence, a
manufacturer would be forced to establish his innocence.
Even a consumer's own negligence in using a
product could b e c o m e evidence o f the manufacturer's negligence. For surely a manufacturer
could foresee that sometimes products would be
misused. Failing to guard against that misuse would
be further evidence of negligence. With no apparent
way to defeat liability, manufacturers were held, in
effect, strictly liable even though courts took pains to
argue on negligence theories.
The tuming point came in Escola v. Coca Cola
Bottling Company. The opinion of the court was
written on a negligence theory, but a brilliant concurrence by Justice Traynor advanced the view that the
real and correct standard of liability for products is
strict. Traynor argued the view that the goals of tort
law are primarily economic ones: deterrence and
insurance. Rules of liability should be designed to
minimize risk and to spread it maximally over persons and time. For Traynor, pursuing both goals
dictated a strict liability standard. His argument has
captured the imagination of judges and scholars alike
for its elegance and coherence.
The argument is as follows. W h e n neither
manufacturer nor consumer is negligent, who should
bear the costs? As between victims and manufacturers, the latter are better suited to obtain insurance
at a lower cost and to spread those costs maximally
over persons and time. Manufacturers are better
suited to invest in safety precautions or to determine
which risks are worth taking. Liability ought strictly
to be imposed upon manufacturers without regard to
their negligence. Pursuing either end - deterrence or
insurance - calls for a standard of strict liability.
By the time the substantive rule of strict liability
was openly imposed on manufacturers, the combination of forces yielded a role very much like absolute
liability: liability for all harms without regard to the
negligence o f the product user. In this regard,
manufacturers were being asked to insure consumers
for all safety-related risks. Tort law became, in effect, a vehicle by which the courts created a private
insurance scheme. Manufacturers insure productusers - period.
Design Defect Tests
In another sense, m o d e m product liability law has
maintained vestiges of negligence. In order to impose liability on a manufacturer some threshold requirement had to be met. This threshold was to be
spelled out in terms o f a manufacturer's failure to
measure up to some standard of conduct either internally or externally imposed. These standards were
represented by "manufacturing" and "design" defect
requirements. A manufacturer's product is said to
suffer a manufacturing defect if it fails to perform as
the manufacturer represents it.
The negligence component is represented by
design defect standards. And here lies the problem.
There is no one design defect test applicable in all
jurisdictions, nor are any of the tests easy to administer. Most importantly, the results under these
standards are not at all predictable.
In a recent article, Alan Schwartz reviews critically four separate design defect tests and finds them all
wanting. These four tests are (1) the expectation test,
(2) the Learned Hand test, (3) the risk/benefit test and
(4) the regulatory/compliance test.
Under the expectation test, a manufacturer can be
liable if its product is less safe than it is reasonable
for a consumer to expect it to be. A manufacturer is
liable under the Learned Hand test if it is negligent in
taking precautions.
Liability under the risk/benefit test is a bit more
complex. A firm's design is defective if, among all
the feasible designs available, the finn fails to adopt
the one which maximizes net benefits. In the
HARNESSING THE AM ERICAN MARKETPLACE 161
regulatory/compliance scheme, the appropriate
standards are set by a regulatory agency and the
court's job is to enforce those standards. Failure to
c o m p l y with the operative safety standard is
negligent; compliance is merely evidence of nonnegligence, not constitutive of it.
The rule of strict liability in conjunction
with design defect tests wreak
havoc within the manufacturing
sector of the economy
The expectation test is not helpful, because, in the
absence of some other test which tells us what level
of safety it is reasonable to assume, the test is empty.
The Learned Hand test is merely the economic
negligence test and reintroduces all the administrative costs of gathering the relevant information about
the benefit and damage schedules of manufacturers
and consumers. That administrative problem is magnified under the general risk/benefit test. How are
juries to determine from among all possible feasible
designs the one that maximizes social welfare? What
do juries know about product design altematives?
The regulatory/compliance test does not negate
uncertainty because a manufacturer cannot know
w h e t h e r c o u r t s w i l l c o n s i s t e n t l y rule t h a t
regulatory/compliance will free the firm from
liability. Together, the rule of strict liability and the
design defect tests have wrought havoc within the
manufacturing sector of the economy.
But is Modern Products Liability Rational ?
Strict liability, as Traynor noted, makes manufacturers insurers of consumers, though a manufacturer
can theoretically recover these insurance costs in
product prices. By adopting strict liability, tort law
has created a system of third party insurance. First
party insurance, the type consumers are most familiar
with, is purchased to protect against something untoward happening to the purchaser. Third party insurance is used to protect against something
untoward happening to someone else for which the
purchaser may be legally or otherwise responsible.
The problem with third party insurance is that it
creates problems of "adverse selection" and "moral
hazard" far in excess of those created under a first
party system. People will be more inclined to pursue
any hospital test or treatment as a result of an accident, regardless of cost, if someone else is paying for
it. But if a person has to pay for the service or buy
the relevant insurance, he or she would be inclined to
consider undergoing only cost-justified treatments.
Third party schemes are also much more expensive
to administer.
So great is the difference in cost between first and
third party insurance, that George Priest, America's
leading insurance scholar, has recently argued that
tort liability's imposition of a third party scheme to
allocate product safety risks is the primary source of
the recent insurance crisis. The logic of Traynor's
argument leads manufacturers to purchase insurance
for consumers that consumers themselves would not
rationally choose.
The design defect tests, which constitute a partial
retreat from the role of strict liability, turn out to be
extremely costly to administer. These tests are so
diverse in their requirements as to give little guidance
to manufacturers seeking to determine the level of
investment in safety they should make. When applied individually, design defect tests will result in
wildly uncertain outcomes. In short, the modem
solution has failed to provide what we seek, a principled, rational and predictable body of law regulating product safety.
The absence of a predictable and rational legal
standard is reflected in the current insurance crunch.
The greatest danger to an efficient insurance market
is radical uncertainty, and that is precisely what the
current products liability regime has given us.
The question, then, is whether there exists a set of
policy recommendations that would add an element
of rationality and certainty to the law governing
product safety. Inthis regard, it is important to reconsider whether abandoning the contract mechanism for
allocating risk was warranted in the first place.
Suggestions for Reform
The most fundamental feature of m o d e m products
liability is the rejection of the market in favor of a tort
solution. This rejection presupposes that "contracts"
between manufacturers and consumers do not or
cannot adequately address issues of safety, and that a
solution must be introduced in the form of a set of
externally imposed standards. The very idea of a tort
or regulatory solution to the allocation of risks regarding product safety is predicated on a presumed
market failure. Contracts betweenmanufacturers and
consumers would be generally inefficient, thus a
62 / SOCIETY
9 NOVEMBER/DECEMBER
1989
state-imposed solution would produce efficiency
gains.
It is not at all obvious that the contract mechanism
for allocating risk between manufacturers and consumers - the market solution - would be grossly
inefficient. Nor is it clear that a general tort or
regulatory solution would produce relative net
benefits as compared with the market alternative.
The usual argument in support of the market
failure theory is that consumers have imperfect information regarding (a) the rights and responsibilities
made explicit in their contracts regarding risk allocation; (b) the relative costs of various contracts; and
(c) the actual risks involved. This argument, however, contains several flaws.
First, contract clauses may be difficult to read or
comprehend. The solution to this problem is not to
reject contracts, but to enhance comprehensibility.
Second, consumers probably do not search adequately for the best contracts, but there is no reason
to believe that this will lead to suboptimal contracts.
It is just as likely that firms will provide the desired
clauses, but exploit the low level of search by recapturing more than their marginal costs for providing
these terms.
Finally, consumers may underestimate or overestimate risks. If they do so systematically, contracts
between consumers and manufacturers are unlikely
to be efficient. It is not at all obvious, however, that
courts and juries are better positioned to make the
appropriate risk/benefit calculations.
The information demands on courts and juries in
applying any risk/benefit test are extraordinary.
Even if systematic imperfect information threatens
the efficiency of the market solution for allocating
safety risks between consumers and producers, it is
not clear that the current approach can do much
better.
The market-failure argument for rejecting contract
in favor o f tort law is inadequately persuasive to
support a total rejection of the market/contract as a
risk-allocation mechanism. One possible reform of
the current law would be to consider ways o f
reintroducing the market as a central instrument in
the allocation o f safety risks. This could be accomplished in either o f two ways.
First, the tort approach could be eliminated entirely in favor of sales contracts. The argument for this
change would be that the tort solution creates more
problems than the contract approach, whatever its
shortcomings. Contract law is the lesser evil. Such
a change is at the present time infeasible.
A second, more attractive solution would be to
combine the contract and tort approaches. The sales
contract can be reintroduced as an option in allocating
risk by allowing parties to contract around tort rules.
In this way, tort rules can apply as default provisions
in the event contracting parties cannot efficiently or
rationally allocate risk among themselves.
Any return to the contract model will increase
predictability since the conditions under which a
manufacturer is held liable are set out with some
considerable degree of certainty in the contract. The
rationality of the allocation and distribution of risk by
contract depends on the rationality and knowledge of
consumers and producers. Consumers may be adequately knowledgeable about the nature and scope of
risk, and that is why we cannot rely entirely on
markets. Rational actors will sometimes need to
avail themselves of rules set by third parties - tort
rules. So it is natural to mix contract with tort approaches.
But if the current tort approach has led to crises,
surely that problem will not be eliminated by the
modest change of reintroducing contract as an option.
Something has to be done about the tort rules themselves, even if they are to apply only as default
provisions.
What should those rules be? One suggestion is
that the rules of tort law be those which "idealized"
consumers and producers - fully rational and informed - would have chosen.
The law of tort, of which product liability law is a
part, governs obligations regarding safety among
strangers. Strangers are persons who, in this sense,
lack a contractual relationship. They are not in contracting relationships because the transaction costs of
contracting are too high.
All auto drivers could, in theory, contract e x a n t e
with everyone who is put at risk by their operating an
automobile. Such a contract would give the driver a
right to put others at risk at some price acceptable to
each person endangered. The costs of finding and
contracting with everyone who might be put at risk
by driving are prohibitive, however, and no contracting occurs. Instead, a rule of liability is imposed in
the event someone is injured by motoring.
What should this rule o f liability be? One way of
answering tiffs question is to imagine that the relevant
parties - motorists and pedestrians - could contract
with one another at low cost. What contract would
they agree to? w h e n contracting or bargaining is too
costly to be rational we might adopt institutional
arrangements that replicate what a contract between
HARNESSING THE AM ERICAN MARKETPLACE 163
the parties would have produced. To determine what
roles should apply among strangers we should ask
ourselves, "What rules would they have created contractually had transaction costs not made their doing
so impossible?"
Ex Ante Contracts
Let us call the strategy for reform that looks to the
preceding question the e x a n t e contract approach.
The case for applying the e x a n t e contract to the
problem o f product liability reform is especially
strong. First, product liability law is a branch o f tort
law, and one way of approaching tort law generally
is to see the rules it sets forth as rational only if they
reflect what individual parties would have contracted
to had not the costs of doing so been prohibitive.
Second, m o d e m products liability law has its roots in
the law of sales, the law in which one's liability is
determined by the mix of contract and privity. In
effect, the rejection of privity imposes a framework
within which ultimate users (and not just immediate
purchasers) are treated as if they had a contractual or
quasi-contractual relationship with the manufacturer.
Cigarette litigation may someday
prove extremely problematic
We might then view products liability as an extension, rather than a rejection of the contract model, in
which case the problem is to specify the terms of a
rational contract between manufacturers and consumers. What would such a contract look like?
By analyzing potential rules of liability in a
hypothetical contract model, we insure that the rules
of tort used as default provisions in failed or incomplete contracts allocate risks in ways contract law
would. There is no discontinuity between the contract and tort approach. Rather, the tort rules extend
the c o n t r a c t approach, e n h a n c i n g the overall
rationality and predictability of the scheme of risk
allocation.
Justice Traynor was right when he noted that
manufacturers and consumers are concerned primarily with two aspects of the risks related to product
s a f e t y - t h e reduction of risk, and its distribution. We
will refer to the first of these as deterrence and the
second as insurance. The questions that need to be
asked are, "How would rational actors distribute and
seek to reduce product safety costs in an optimal
contract?" and "How would adhering to that allocation scheme alleviate problems inherent in the current
regime?" Answering these questions promises a rational and predictable tort scheme for defective
products.
The Social Insurance Function of Products Liabifity
One advantage of strict liability is that is serves a
private social insurance function. Manufacturers
who are better situated to purchase insurance do so,
then pass the costs to consumers, each of whom in
effect buys insurance and pays a very small premium
as part of a product's overall costs. This cost,
presumably, is far less than what a consumer would
have to pay to purchase insurance on his or her own,
if in fact, an individual could purchase sufficient
insurance.
But does this procedure reflect how manufacturers
and consumers would distribute the costs o f insurance among one another is they could do so by
contract? The answer is yes and no. This may well
be the way manufacturers and consumers would distribute insurance costs, but would consumers and
manufacturers seek insurance against all risks?
Under current law, all risks are insured. But in
response to the question, rational consumers would
probably not seek insurance against all risks.
Consumers appear to insure against pecuniary losses, but are less likely to insure against nonpecuniary
ones. What is the difference? The difference is
usually explained in terms of the marginal utility of
the dollar. Individuals do not secure the same utility
from each dollar they possess. If someone has a great
deal of money now, but expects to have very little in
the future, some of his current dollars would be worth
more to him later than they are worth now. A rational
agent will try to f'md a way to shift current dollars to
the future, when they will be worth more. One way
of doing this is to purchase insurance. It follows that
rational people will seek insurance - move money
from the present to the future - when the agent's
marginal utility from these monies will increase in a
future period.
Pecuniary losses increase a person's marginal
utility of money. If at some future point someone is
unable to work as a result of an accident, that person's
income drops and the value of each dollar relative to
its current value may increase. To equalize expected
utility, dollars are shifted from "now" until "later" by
purchasing insurance.
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9 NOVEMBER/DECEMBER
1989
Rational actors will tend to buy insurance against
pecuniary losses. If one point of a tort liability rule
imposed on product manufacturers is to provide insurance to consumers, then a rule which reflects the
contract that rational consumers would choose is one
that provides full recovery for pecuniary losses.
Nonpecuniary losses, in contrast, do not increase the
marginal utility of money. For that reason rational
actors are unlikely to insure against them.
The problem is to identify which losses are nonpecuniary. Several commentators have suggested
that "pain and suffering" awards fall into the category
of recompense for a nonpecuniary loss, and that such
damage awards should, therefore, be eliminated. In
support of this claim, some have noted that insurance
companies do not sell "pain and suffering" insurance
on a first party basis. The absence of available
coverage in a competitive industry suggests insufficient demand. This fact supports the hypothesis that
rational actors do not guard against nonpecuniary
losses, and also reinforces the intuition that pain and
suffering constitute nonpecuniary costs.
One caveat should be mentioned with regard to the
inferences just drawn. The absence of a market for
first party insurance for nonpecuniary losses does not
necessarily demonstrate the absence of demand. Insurers may be disinclined to offer the insurance,
whatever the extent of the demand, because they fear
fraudulent claims.
These considerations suggest that manufacturers
should not be required to provide coverage for nonpecuniary losses precisely because, in the absence of
a tort law rule that provides it for them, rational
consumers do not demand such protection. One additional suggestion for revision in current practice is
to reduce drastically, or to eliminate entirely,
recovery for nonpecuniary losses.
This proposal is interesting because it shows the
tension in all reform proposals as well as the difficulty inherent in any proposal. It typically evokes the
response, "Since nonpecuniary losses are caused by
the manufacturer, why should he not pay for these
costs?"
How we resolve the question of who bears the risks
of nonpecuniary losses depends on how we view the
purposes of tort law. If we start out with the premise
that parties causing harm should be liable for all the
losses they cause, it appears as if manufacturers
should bear those risks. However, if we begin with
the premise that tort rules emerge only because the
market fails and that a sensible tort scheme would
reflect an ideal market solution, we come to a dif-
ferent conclusion. In this case, because consumers
would not purchase insurance against nonpecuniary
losses, it follows that manufacturers should not be
required to provide that insurance.
Reducing Risk
Consumers are at least as interested in reducing
risk as they are in insuring against it. How then do
we reduce risks to consumers and who should be
responsible?
Returning to Escola, the California Supreme Court
argued that not only were manufacturers better suited
to distribute risk (via insurance) but that, as between
them and consumers, producers were better suited to
reduce risk, or to decide which risks were worth
reducing.
Manufacturers can better reduce risk, but how
much risk reduction do consumers want? Consumers
do not want to purchase more safety than is rational.
If safety prevention costs are accurately reflected in
product prices, consumers will want manufacturers
to engage in optimal safety prevention activities.
The consumer's demand for efficient investment
in safety can be met by a variety of very different tort
liability rules. Several commentators have shown
that both negligence and strict liability with the
defense of plaintiff's contributory negligence are efficient in the relevant sense. Either a negligence rule
or a strict liability rule can, in theory, produce efficient investments in safety.
Consider an accident causing $100 of harm.
Spending $50 successfully to prevent it would be
rational; spending $200 would not be. Assuming we
were "risk neutral," we would want a potential injurer
to spend anything up to $99 to prevent the harm, but
nothing above $100. Both negligence and strict
liability give us that result.
U n d e r negligence, a m a n u f a c t u r e r will be
negligent if she does not spend $99 to prevent $100
of damage. If she does not spend $99, she will be
liable for $100, and therefore she will pay $100. But
it will make sense for her to pay $99 rather than $100,
and she will do so.
Under strict liability the manufacturer will .be required to pay the $100 no matter what. In that case,
if causing harm is a product of a course of conduct
costing less than $100 to avoid, she simply will not
engage in it. We get the same result.
On the other hand, if it costs $150 to prevent the
harm, then under negligence, we will not want an
agent to spend this $150. And so the accident occurs.
The same is true under strict liability. The injurer will
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bear the $100 costs no matter what. But if the activity
that causes it would cost $150 to prevent, she will
forego prevention. The incentives for safety- at least
with respect to injurers - are the same under both
rules. A liability regime seeking to provide the safety
consumers would have bargained for by contract can
choose either strict or negligence liability.
A tort law approach to products
liability increases uncertainty
and the costs of doing business
Modem products liability is a mixture of strict and
negligence hability with that distinction reflected by
the difference between manufacturing and design
defect tests. The manufacturing defect test is a form
of strict liability. Manufacturers are liable if their
products fail to measure up to their own standards.
Liability that is strict in this sense is desirable on
several grounds, not the least of which is its concreteness and predictability. To choose only a manufacturing defect test is to choose strict liability; to choose
a design defect test is to take the negligence approach
to safety.
The greatest degree of uncertainty and unpredictability arises in the apphcation of design defect
standards. Consumers want optimal safety and
manufacturers want predictability. Both of these can
be accomplished by jettisoning all design defect tests
in favor of a simple rule of strict liability that allows
defendants to defeat claims against them by establishing the contributory negligence of product users.
Manufacturers will then be liable for all harms their
products cause unless the injuries result from product
misuse or inadequate care by consumers. Such a rule
is efficient, knowable, and far easier to administer
than any of the alternatives for assessing design
defect. Not only does this rule of strict liability with
contributory negligence replicate the ideal contract,
it is also fair. Unlike the current regime, such a rule
allows manufacturers to escape or to reduce liability
when injuries are wholly or partially the fault of
victims.
The current practice, in contrast, is weighted
towards getting questions to a jury and framing those
questions in ways that unduly burden manufacturers.
Instead of asking whether the victim took inadequate
care in maintaining or using a product, the current
system asks whether the manufacturer could have
foreseen that a consumer might misuse or negligently
use a product. Under the negligence rule, a victim's
negligence has the perverse effect of enhancing rather
than defeating his case for recovery. The design
defect tests may well have reduced rather than increased the consumer's incentive to take care.
The kind of product liability law needed is one that
increases both predictability and rational investment
in safety. A rule of strict liability with defenses of
victim misuse is both predictable and efficient. It
distributes risks in just those ways consumers and
manufacturers would by contract if information about
risks were easy to come by and interpret.
Providing for Nonpecuniary Losses
Two final problems remain. Justice Traynor held
the view that deterrence and insurance goals can be
pursued coherently and simultaneously, and he
t h o u g h t strict l i a b i l i t y was the a p p r o p r i a t e
mechanism for doing both. But the argument presented here may raise doubts about this assumption.
If we start with the contract model, then consumers
should not be compensated by manufacturers for
nonpecuniary losses. If manufacturers are not required to compensate their consumers fully, then
they will not have to bear the full social costs of their
conduct. They will be led to underinvest in safety.
There is, at least in theory, a solution to this dilemma. Questions of liabihty should be separated from
questions about recovery. This distinction between
reasons for holding someone liable and reasons for
compensating someone helps us to see our way clear
of the dilemma.
Manufacturers can be required to compensate victims for all pecuniary costs, but deny victims
recovery for nonpecuniary ones. At the same time,
fines can be imposed on manufacturers equal to the
nonpecuniary costs caused by their products. The
imposition of fines moves the proceeding away from
the law of tort as we know it, creating a role for a
regulatory or administrative agency. We may be able
to pursue both the insurance and deterrence goals but
not with only one institution such as the tort law.
This solution may strike some as controversial and
odd. Why should manufacturers pay fines to
regulatory agencies who are not victims of defective
products? Why not just compensate the tree victims?
If we allow victims to recover both pecuniary and
nonpecuniary damages through the courts, we do not
create a need for regulatory intervention in the
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process. This would create an additional saving in
administrative costs.
To achieve deterrence, we must make manufacturers liable for the full costs of their conduct, and
that includes both pecuniary and nonpecuniary costs.
We can simply allow victims to recover both. On the
other hand, if we decide that victims should not be
allowed to recover nonpecuniary losses, then we have
to f'md some other way of making manufacturers pay
the difference.
Manufacturers should not be
required to provide coverage
for nonpecuniary losses
We am tom in two directions. On the one hand, it
seems "fair" that victims should be compensated for
their losses - all losses. On the other hand, why
should consumers secure insurance through product
liability for losses they would not themselves ordinarily insure against?
I offer no solution to this problem, and instead
highlight the factors relevant to resolving it. If we
begin by viewing manufacturer's liability from the
perspective of the market model, then we simply
must reject victim recovery for nonpecuniary loss.
The argument for allowing consumers to recover
nonpecuniary losses requires the formulation of a
different basis for product liability, perhaps one
grounded in principles of corrective justice.
ExtraordinaryCases
This leads to a final suggestion: ordinary and
extraordinary cases should be examined separately.
In the extraordinary case, the damage affects so large
a population, sometimes over such a long period of
time, that the ordinary tort solution of case-by-case
adjudication seems inappropriate. It is too costly and
inconsistent. It may lead to significant injustices.
Cigarette litigation may someday prove extremely
problematic. If court decisions ultimately go against
the tobacco industry, hundreds of thousands of individuals, not just this year, but every year for some
considerable period of time, will have claims to advance against the industry. Litigating these cases
individually does little to enhance deterrence or insurance. Nor will bankrupting cigarette manufacturers do much to provide compensation for people
who will suffer from smoking-related illnesses 20
years from now.
In these mega-injury cases we should also separate
the aims of compensation from those of deterrence.
Rather than pursuing both through tort channels,
adopting a regulatory approach to deterrence and
creating a fund for compensation is a possibility.
The present tort system leads to radical changes in
manufacturing product decisions like the widespread
and deep removal of product lines on a year-to-year
basis. A tort law approach to products liability increases uncertainty and, therefore, the costs of doing
business - costs ultimately borne by consumers.
Weakened defenses under the current system do little
to encourage consumer cam in the maintenance and
use of products, thus increasing the manufacturer's
exposure to liability without a consequent increase in
safety.
By reinstituting the market as a vehicle for allocating risk, we reintroduce a low-cost instrument.
Private arrangements are less cosily than public ones.
This is not to say that all risk should be imposed by
the terms of private contracts. After all, not every
consumer is knowledgeable about the relevant risks.
But allowing a market solution permits consumers
and manufacturers who want to contract around the
tort rules to do so. One purpose of the law then is to
provide a framework for private arrangements, not
simply an alternative to private arrangements.
There are no easy answers to this complicated
problem. These proposals am offered in the spirit of
open and free public debate. The goal is to get
concemed citizens and officials to think about the
problems systematically and to be open to a variety
of possibilities. We cannot permit a system that is so
confusing to manufacturers, and ultimately costly to
consumers, to continue unaltered.
Jules L. Coleman is Professor of Law and Philosophy
and lecturer in Political Science at Yale University.