BRUCE DOMAZLICKY PROFESSOR OF ECONOMICS

SOUTHEAST MISSOURI STATE UNIVERSITY

Products Liability in the United States

Outline of Presentation

Historical BackgroundStrict Liability v. Negligence3 Ways that products can be defectiveDefenses in products liability casesComputation of damagesThe Liability “Crisis” in the United StatesPossible Reforms

Historical Background

Privity of Contract-protected manufacturersEscola v. Coca-Cola Bottling Co. (1944)

(negligence standard applied, res ipsa loquitur)

Greenman v. Yuba Power Products, Inc. (1963) (strict liability applied by Supreme Court of California)

Why Strict Liability?

Manufacturer in best position to prevent defectsManufacturer best understands the risk of using

the productManufacturer can spread risk of loss over all

units sold through increase in priceProving negligence by manufacturer difficult for

consumerGives manufacturer incentive to adopt cost-

justified improvementsDeep pockets??

Three Ways a Product Is Defective

Manufacturing Defect-usually the easiest to prove

Design DefectDueling ExpertsJeopardizes manufacturer’s entire product line

Failure to Give Adequate Warning

Warning: Cape does not allow person to fly. Cape does not give personSuperhuman powers.

Warning: Product contains eggs.

Warning: Product may cause drowsiness.

Economics of Hazard Warnings

Provide consumer with information on risk of using product

Consumer then decides if the expected utility of his use of product exceeds the expected cost of using the product, including risk

Role of Warnings

Influence the Decision to Purchase a ProductInfluence the level of care of consumer when

using the product

Problems with Current Warning Regime

Information Overload-to be effective, warnings need to be selective

Label ClutterExcessive Warnings-warnings should provide

new information, no need to warn of obvious risks

Defenses in Products Liability Cases

Unforeseeable MisuseDaniell v. Ford Motor Co. (1984)Cryts v. Ford Motor Co. (1978)

Unreasonable Assumption of RiskProduct has obvious defect and consumer chooses to use it anyway

State of the Art Defense (Design Defect Cases)

Calculating Damages: Some Issues

Some Damages easy to Compute: Lost Earnings, Medical Expenses

Other damages More difficult: Value of Life, Pain & Suffering, Loss of Consortium

Collateral Source Rule-allows recovery even when third party covers costs Medical Insurance-subrogation clausesLife Insurance

Joint and Several LiabilityPunitive Damages

Liability “Crisis”

1975-89: Products Liability Cases Increased Sixfold

1984-1987: Liability Premiums Increased from $6.5B to $20B

1985: Premiums Increased 78%1986: Premiums Increased another 68%

Contributors to Crisis

Mass Toxic Torts: Asbestos CasesDesign Defect DoctrineHazard Warning Cases

Manufacturers’ Concerns

Stock Market LossRetroactive Losses: Cannot go back and raise

price to spread cost of lawsuitsLiability for not warning about hazard that

was unknowable at the time of manufacture (asbestos)

Possible Reforms

Allow state of the art defense(Problem: Reduces incentive to improve product)

Shorten the statute of limitations(Problem: Some risks take a long time to appear)

Change collateral source rules so can only collect up to amount of loss(Problem: manufacturer may not get correct signals)

Possible Reforms, Continued

Joint and Several Liability-defendants are only responsible for their share of loss(Problem: Plaintiffs may not get full compensation)

Limit Pain & Suffering Awards(Problem: Plaintiffs may not get full compensation)

Loser Pays Court Costs, Lawyers’ Fees(Problem: Consumers afraid to sue)