The uneasy case for product liability

Harvard Law Review

Volumn 123, Issue 6, 2010, Pages 1437-1492

  Polinsky, A Mitchell ^a   Shavell, Steven ^a  

^a STANFORD LAW SCHOOL   (United States)

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EID: 77955497640     PISSN: 0017811X     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (398)

1. RESTATEMENT (THIRD) OF TORTS: PRODUCTS LIABILITY § 1 (1998) [hereinafter RESTATEMENT (THIRD)] ("One engaged in the business of selling or otherwise distributing products who sells or distributes a defective product is subject to liability for harm to persons or property caused by the defect."); id. § 1 cmt. c ("The rule stated in this Section applies ⋯ to manufacturers and other commercial sellers and distributors ⋯.").
2. see also RESTATEMENT (SECOND) OF TORTS § 402A (1965) [hereinafter RESTATEMENT (SECOND)].
3. See generally DAN B. DOBBS, THE LAW OF TORTS § 352, at 969-972 (2000).
4. DAVID G. OWEN, PRODUCTS LIABILITY LAW § 1.1, at 1-10 (2005).
5. The most recent year for which relevant data are available is 2006. In this year, 6454 product liability cases were filed in the nine states studied by the National Center for State Courts. NAT'L CTR. FOR STATE COURTS, EXAMINING THE WORK OF STATE COURTS, 2007: A NATIONAL PERSPECTIVE FROM THE COURT STATISTICS PROJECT 17 (Robert C. LaFountain et al. eds., 2008), available at http://www.ncsconline.org/D-Research/csp/2007-files/Examining%20Final%20- %202007%20-%201%20-%20Whole%20Doc.pdf (providing annual product liability caseload numbers from 1997 to 2006 in a spreadsheet that can be accessed by clicking on the "x" icon to the left of the phrase "Product Liability"). Using population data from the U.S. Census Bureau to extrapolate from this number to the nation as a whole results in 29,163 state product liability cases in 2006.
6. See U.S. CENSUS BUREAU, THE 2009 STATISTICAL ABSTRACT 17 tbl.12 (2009), available at http://www.census.gov/prod/2008pubs/09statab/pop.pdf. In fiscal year 2006, there were also 49,743 product liability cases filed in federal district court. ADMIN. OFFICE OF THE U.S. COURTS, 2007 ANNUAL REPORT OF THE DIRECTOR: JUDICIAL BUSINESS OF THE UNITED STATES COURTS 59 tbl.S-10 (2008). Hence, the estimated number of state and federal product liability cases in 2006 is 78,906. For an example of a product liability class action involving a large number of individuals, see In re Diet Drugs, Nos. 1203, 99-20593, 2000 WL 1222042, at *41 (E.D. Pa. Aug. 28, 2000), in which the court approved a settlement in favor of a class of approximately six million users of diet drugs.
7. See also 1 ALBA CONTE & HERBERT NEWBERG, NEWBERG ON CLASS ACTIONS § 3:5, at 243-246 (4th ed. 2002) ("Class actions under the amended Rule 23 have frequently involved classes numbering in the hundreds, or thousands, or even millions." (footnotes omitted)). Although the ability of plaintiffs to bring product liability suits as class actions has diminished in recent years, other means of aggregating cases are available to them.
8. See Deborah R. Hensler, Has the Fat Lady Sung? The Future of Mass Toxic Torts, 26 REV. LITIG. 883, 904 (2007) ("[A] review of federal product liability filings and MDL [Multidistrict Litigation] activity suggests that mass product liability litigation is still very much alive.").
9. See infra notes 59-62 and accompanying text.
10. See infra section VII.C, pp. 1487-1490
11. See generally LOVELLS, PRODUCT LLABILITY IN THE EUROPEAN UNION: A REPORT FOR THE EUROPEAN COMMISSION 31 (2003) ("There has been a noticeable increase in the number of product liability claims in the EU in the last 10 years.").
12. Id. at 37
13. OWEN, supra note 1, § 1.4, at 49 ("[O]ver the last decade or two of the twentieth century, and the beginning years of the current century, modern products liability law and litigation has begun to spread its wings around the world.")
14. An Explanation of Japan's Product Liability Law, 5 PAC. RIM L. & POL'Y J. 299 (Thomas Leo Madden trans., 1996) (describing a 1994 law that enhanced the Japanese product liability regime).
15. Mathias Reimann, Liability for Defective Products at the Beginning of the Twenty-First Century: Emergence of a Worldwide Standard?, 51 AM. J. COMP. L. 751, 756-60 (2003) ("[P]roduct liability has established itself in the vast majority of economically developed countries,⋯ it is recognized as a special subject in many other parts of the world, and ⋯ there is a tendency for it to spread further. In short, it is fast becoming a global phenomenon." Id. at 757.).
16. Craig S. Smith, Chinese Discover Product-Liability Suits, WALL ST. J., Nov. 13, 1997, at B1 ("In the three years since China's consumer-rights laws took effect, liability lawsuits have risen to more than half a million annually").
17. See infra section VII.B, pp. 1483-1487
18. Our benefit-cost evaluation of product liability follows in the tradition of the analysis of tort law from a social welfare-maximizing or instrumental perspective. For a prominent early example of this economic approach, see GUIDO CALABRESI, THE COSTS OF ACCIDENTS (1970).
19. See also WILLIAM M. LANDES & RICHARD A. POSNER, THE ECONOMIC STRUCTURE OF TORT LAW (1987)
20. STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW (1987). As is conventional in such analysis, we do not consider notions of fairness, on which individuals may place value and which thus should in principle be incorporated into social welfare.
21. See generally LOUIS KAPLOW & STEVEN SHAVELL, FAIRNESS VERSUS WELFARE (2002). As is also conventional in economic analysis, we do not take the effects of legal policy on the distribution of income into account. One reason is that redistribution of income may be difficult to accomplish through the law when, as here, the relevant parties are in a market relationship - notably, an attempt to redistribute income from manufacturers to consumers by imposing liability on manufacturers could be undone by price increases.
22. See generally Richard Craswell, Passing On the Costs of Legal Rules: Efficiency and Distribution in Buyer-Seller Relationships, 43 STAN. L. REV. 361 (1991). In addition, it can be argued that legal rules should not be employed to redistribute income because the income tax and transfer system can better serve that purpose.
23. See generally Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994).
24. Additionally, we explain that compensation for nonmonetary losses further discourages consumption and results in consumer welfare losses.
25. The methodology that we employ to evaluate product liability could also be used to evaluate the liability of providers of services, such as physicians and accountants. It does not matter to our logic that what is purchased is a service rather than a product. The conclusions, of course, might be different.
26. See infra Part IX, pp. 1491-1492
27. See generally MICHAEL S. GREVE, HARM-LESS LAWSUITS? WHAT'S WRONG WITH CONSUMER CLASS ACTIONS (2005) (claiming that the current product liability system results in double recoveries and excessive deterrence).
28. ERIC HELLAND & ALEXANDER TABARROK, JUDGE AND JURY: AMERICAN TORT LAW ON TRIAL (2006) (maintaining that unwarranted awards are often given to plaintiffs, and that judges and juries frequently exhibit bias in making such awards).
29. PETER W. HUBER, LIABILITY: THE LEGAL REVOLUTION AND ITS CONSEQUENCES (1988) (arguing that unduly high awards in product liability cases, and tort cases more generally, chill innovation and overdeter socially desirable behavior).
30. In other words, we consider the desirability of product liability against the background of the world as we find it, including the way in which market forces and regulation now operate. One could instead examine product liability against the background of an ideal world, in which, for example, market forces might be supplemented with additional government-provided information about product risks and safety regulation might be more extensive. Such an undertaking is beyond the scope of this Article.
31. See Tamar Lewin, Tylenol Posts an Apparent Recovery, N.Y. TIMES, Dec. 25, 1982, at 30 (noting that Tylenol had a 35% market share before the deaths and quoting a company executive who said that "[w]e lost 87 percent of our market"). After Johnson & Johnson switched to tamper-resistant packaging of its Tylenol product and instituted an extensive coupon campaign offering free Tylenol, Tylenol's market share returned to 24%, still significantly below its earlier 35% market share. Id.
32. See Brenda L. Moore, Time May Be Right To Take Bite of Odwalla, WALL ST. J., Aug. 19, 1998, at CA1.
33. See Warren King, Another Toddler Treated for E. Coli, SEATTLE TIMES. Nov. 15, 1996. at B3.
34. See Bradley A. Stertz, U.S. Study Blames Drivers for Sudden Acceleration, WALL ST. J., Feb. 2, 1989, at B1 ("Within the past three years, fears that Audis were prone to sudden acceleration cut U.S. sales of the models from an all-time high of 74,000 units in 1985 to just 22,943 last year."). While this article suggests that there might not have been a mechanical problem causing sudden acceleration of Audi automobiles, the pronounced reduction in the sales of Audis shows that consumer beliefs about the safety of a product can strongly influence demand for it.
35. See, e.g., RICHARD N.L. ANDREWS, MANAGING THE ENVIRONMENT, MANAGING OURSELVES 213-214 (2d ed. 2006) (observing that sales of cranberries dropped by two-thirds after the discovery that some cranberries had been sprayed with a potentially toxic pesticide).
36. GARY DAVIES ET AL., CORPORATE REPUTATION AND COMPETITIVENESS 110-111 (2003) (noting that Perrier's U.K. market share fell from 32% to 17% in the month following an announcement of benzene contamination).
37. RONALD D. MICHMAN & EDWARD M. MAZZE, THE FOOD INDUSTRY WARS 140-141 (1998) (reporting that Gerber's market share declined from 72% to 52% in 1986 after bits of glass were found in Gerber peaches in several states).
38. Suresh Govindaraj, Bikki Jaggi & Beixin Lin, Market Overreaction to Product Recall Revisited - The Case of Firestone Tires and the Ford Explorer, 23 REV. QUANTITATIVE FIN. & ACCT. 31, 40 (2004) (observing that there was an "immediate drop of 50 percent ⋯ in the worldwide sales of Firestone tires" in the wake of their recall).
39. Dealing with Low Turnover, TIME, Aug. 15, 1988, at 33 (reporting a 63% decline in sales of the Suzuki Samurai after a Consumer Reports article claimed that it was unsafe to drive).
40. Stephen Foley, Mattel Sales Hit by 'Toxic Toy' Recalls, INDEPENDENT (London), Oct. 16, 2007, at 37 (noting that Mattel suffered a 19% decline in sales after a recall of leadtainted toys).
41. Jack in the Box's Worst Nightmare, N.Y. TIMES, Feb. 6, 1993, at L35 (reporting that Jack in the Box's sales dropped sharply after an E. coli outbreak was linked to its food products).
42. Val Brickates Kennedy, Guidant Reports Lower Sales, Profit, WALL ST. J. MARKETWATCH, Jan. 27, 2006, http://www.marketwatch.com/story/guidant-reports- lower-sales-profit-for-fourth-quarter (stating that sales of Guidant defibrillators fell 19% following product recalls).
43. See William Boulding & Devavrat Purohit, The Price of Safety, 23 J. CONSUMER RES. 12, 24 (1996) (finding that Volvo is able to charge one of the highest premiums for its cars).
44. Chuck Squatriglia, Volvo Promises an Injury-Proof Car by 2020, WIRED, May 2, 2008, http://www.wired.com/autopia/2008/05/volvo-promises ("Volvo's long been at the forefront of vehicle safety. It invented three-point safety belts and was the first to use crumple zones, side-impact airbags and rear-facing child seats. In a 2006 survey of 500 consumers conducted by Accenture, more than two-thirds of respondents ranked safety as the most important technology to include in their vehicles, 70 percent were willing to shell out extra for it. Volvo's long been the best at marketing safety, and a recent poll by Consumer Reports found 77 percent of respondents consider Volvo the safest car on the road.").
45. Taking the Fear Out of Flying: Cirrus Sales Soaring to the Stratosphere, NODAK NEIGHBOR, Nov.-Dec. 2005, at 1, 4 ("The parachute innovation has Cirrus nipping at the tail wings of long-time industry leader Cessna.").
46. Austin Weber, Cirrus Soars with Composites, ASSEMBLY, Sept. 2008, at 26, 27 (noting that the Cirrus SR22 is the "world's best-selling aircraft," in part because of its reputation for being "safe and easy to fly" and in part because Cirrus "pioneered the unique concept of a plane with a parachute").
47. More Consumers Turn on to Tap Water To Trim Costs, WALL ST. J., Jun. 18, 2008, at B5D (observing that a year's worth of bottled water purchased from Costco would cost over $400, while the same amount of tap water would cost $0.51).
48. Branden B. Johnson, Comparing Bottled Water and Tap Water: Experiments in Risk Communication, 13 RISK: HEALTH, SAFETY & ENV'T 69, 81 (2002) (finding that 43% of respondents thought that bottled water was safer than tap water, while only 3% of respondents thought the reverse). It is possible that individuals' perceptions of the safety of bottled water are exaggerated, but this example still supports the proposition that consumers' willingness to pay for a product depends significantly on their views of its safety.
49. The more information consumers have about product risks, the better will be the market incentives acting on manufacturers to improve safety. In principle, if consumers possessed perfect information, any risk-reducing precaution whose cost is less than its value would be taken by a manufacturer. For instance, if consumers understand that a $25 safety guard for a chainsaw will reduce accident losses by $100, a manufacturer will include the safety guard with its chainsaws; consumers will gladly pay an extra $25 for the guard because it will reduce their losses by more than that amount. Of course, consumers are not perfectly informed in fact, so that market incentives generally will lead to less than optimal safety.
50. The ten most widely read newspapers during the six month period ending on September 30, 2009, had a total paid daily (Monday through Friday) circulation of 8.36 million. In order of circulation, they were The Wall Street Journal, USA Today, The New York Times, The Los Angeles Times, The Washington Post, The New York Daily News, The New York Post, The Chicago Tribune, The Houston Chronicle, and The Philadelphia Inquirer.
51. See Audit Bureau of Circulations, E-Circ Database, Newspapers, http://abcas3.accessabc.com/ecirc/newsform.asp (last visited Feb. 27, 2010) (on file with the Harvard Law School Library). A LexisNexis search of these newspapers for the word "product" within five words of the words "safety," "danger," or "injure," or the words "accident" or "defect" along with the words "injure," "danger," or "hurt" returned 1412 articles published in the six month period between April 1, 2009, and September 30, 2009 (search last conducted Feb. 27, 2010).
52. A LexisNexis natural language search for the keywords "dangerous," "consumer," "product," "safety," and "injury" in Newsweek returned the maximum 100 articles for the calendar year 2008, including articles on the danger of cosmetics, baby bottles, and small cars.
53. See, e.g., Jac Chebatoris, For a Superhealthy Glow, NEWSWEEK, Mar. 24, 2008, at 79 (discussing the safety of cosmetic products).
54. Anna Kuchment, The Baby Bottle Blues, NEWSWEEK, Jan. 14, 2008, at 53 (addressing the safety of baby bottles).
55. Keith Naughton, Small. It's The New Big, NEWSWEEK.COM, Feb. 16, 2008, http://www.newsweek.com/id/112729 (citing safety concerns as the most important reason that more small cars have not been sold). A similar search in U.S. News & World Report also returned the maximum 100 responses, including articles on the safety of all-terrain vehicles (ATVs), sugar substitutes, and plastics.
56. See, e.g., Deborah Kotz et al., 12 Ways To Childproof Your Kids' Summer, U.S. NEWS & WORLD REP., July 2, 2007, at 59, 60-61 (reporting on children's risk of injury as a result of operating ATVs).
57. Adam Voiland, Here Comes the Controversial New Sugar Substitute Stevia, U.S. NEWS & WORLD REP., Sep. 15, 2008, at 90 (highlighting safety concerns about a new sugar substitute).
58. Adam Voiland, More Problems With Plastics, U.S. NEWS & WORLD REP., May 19, 2008, at 54 (discussing safety issues associated with human exposure to hormone-disrupting synthetic chemicals found in common consumer products, including vinyl tiles and shower curtains, processed food, cosmetics, and toys and baby products).
59. According to the Audit Bureau of Circulations, there are 33 specialized sports magazines (including Climbing, Surfing, and Ski Magazine), 32 fishing or hunting magazines (including American Hunter, Guns & Ammo, and Game & Fish Magazine), 37 automotive magazines (including Motor Trend and Car and Driver), 10 boating or yachting magazines (including Boating), and 4 aviation magazines (including Flying) in regular circulation.
60. See Audit Bureau of Circulations, E-Circ Database, Consumer Magazines, http://abcas3.accessabc.com/ecirc/magform.asp (last visited Feb. 27, 2010) (on file with the Harvard Law School Library). These magazines frequently include items concerning product safety, product malfunctions, and recalls.
61. See, e.g., Bailout Bottles, SCUBA DIVING MAG., Oct. 18, 2006, http://www.scubadiving.com/gear/2006/10/bailoutbottles (rating several emergency air supply bottles for scuba divers).
62. Bindings, SKI MAG., Sept. 2005, http://www.skinet.com/ski/gear/2005/09/ bindings (discussing safety features of ski bindings).
63. Smith & Wesson Issues Product Safety Warning and Recall Notice, SHOOTING TIMES, Sept. 21, 2006, http://www.shootingtimes.com/swpr-092206.
64. For instance, an electronic search of the print edition of Consumer Reports returned 154 articles containing the word "safety" in the calendar year 2008, including articles on the safety of pet food, cooktop stoves, and vacuum cleaners. See, e.g., Salmonella Taints Pet Food, CONSUMER REP., Dec. 2008, at 15 (noting the recall of dog and cat food due to salmonella contamination).
65. Speedier Cooktops and Wall Ovens, CONSUMER REP., Dec. 2008, at 59 (discussing the safety features of a Miele cooktop).
66. Vacuums: Our Tests Show Several Standouts and Some Big Names To Skip, CONSUMER REP., Oct. 2008, at 34, 35 (rating two vacuum cleaners as "Not Acceptable" because of safety hazards).
67. According to the Audit Bureau of Circulations, the total paid circulations for Newsweek, U.S. News & World Report, and Time during the six-month period ending December 31, 2009, were approximately 1.97 million, 1.19 million, and 3.33 million, respectively. Motor Trend had a total paid circulation of approximately 1.14 million, while Guns & Ammo had a total paid circulation of 413,239. The total circulation for the special interest magazine categories identified supra note 25 was approximately 30.02 million.
68. See Audit Bureau of Circulations, E-Circ Database, Consumer Magazines, http://abcas3.accessabc.com/ecirc/magform.asp (last visited Feb. 27, 2010) (on file with Harvard Law School Library). Consumer Reports magazine, ConsumerReports.org, and the newsletters Consumer Reports on Health and Consumer Reports Money Adviser have combined subscriptions of more than 8 million. See ConsumerReports.org, Our Mission, http://www.consumerreports.org/cro/aboutus/ mission/overview/index.htm (last visited Feb. 27, 2010). Of course, there is some overlap among the subscribers of the magazines discussed in this note.
69. See, e.g., 20/20: After the Crash (ABC television broadcast July 16, 1999) (reporting on automobile gas tanks exploding due to design defects).
70. 20/20: Toys in Trouble? (ABC television broadcast Nov. 13, 1998) (addressing the presence of the possibly harmful chemical phthalate in soft plastic toys).
71. 60 Minutes: Is Your Car Safe? (CBS television broadcast June 11, 1978) (discussing problems with the Ford Pinto's gas tank).
72. cited in W. PAGE KEETON ET AL., PRODUCTS LIABILITY AND SAFETY 841 (2d ed. 1989); 60 Minutes: Testing, Testing, Testing; Weapons Are the Only Manufactured Consumer Products Not Subject to Safety Inspections (CBS television broadcast Mar. 20, 1994) (covering handgun safety).
73. CBS Evening News (CBS television broadcast Nov. 20, 2007) (addressing lead levels in popular toys, including Dora the Explorer and Spongebob Squarepants items).
74. In 2008, the viewership of the ABC evening news program averaged 8.1 million; that of CBS averaged 6.1 million; and that of NBC averaged 8.6 million. Pew Project for Excellence in Journalism, The State of the News Media, http://www.stateofthemedia.org/2009/index.htm (follow "Network TV Audience" hyperlink) (last visited Feb. 27, 2010). The average primetime audience in 2008 of Fox News was 2.02 million and that of CNN was 1.05 million. Id. (follow "Cable TV Audience" hyperlink).
75. In 2008, the audience of 60 Minutes averaged 11.9 million, and that of 20/20 averaged 6.1 million. Id. (follow "Network TV News Magazines" hyperlink).
76. One way to find information about the safety of a particular product is to search for it using Google. For instance, a consumer can obtain data on the safety of the Toyota Tundra truck by entering the search terms, "safety toyota tundra 2008" into Google. The results include the Insurance Institute for Highway Safety's test results for the Tundra. See Ins. Inst, for Highway Safety, Toyota Tundra, http://www.iihs.org/ratings/ratingsbyseries.aspx? id=444 (last visited Feb. 27, 2010). A Google search for "bike helmet safety" leads to, among other sites, the Bicycle Safety Helmet Institute, which provides ratings of bicycle helmets. See Bicycle Helmet Safety Inst., http://www.helmets.org (last visited Feb. 27, 2010). Another way to find product safety information is to examine the web sites of organizations that address this topic. See, e.g., Ctr. For Science in the Pub. Interest, http://www.cspinet.org (last visited Feb. 27, 2010) (evaluating food safety); Consumeraffairs.com, http://www.consumeraffairs.com (last visited Feb. 27, 2010) (supplying information about product recalls)
77. Consumers Union, http://www.consumersunion.org (last visited Feb. 27, 2010) (assessing the safety of automobiles, household appliances, and many other products)
78. Flight Safety Found., Aviation Safety Network, http://aviation-safety. net/database (last visited Feb. 27, 2010) (providing aircraft safety incident data, including by aircraft type)
79. Ins. Inst. for Highway Safety, http://www.iihs.org (last visited Feb. 27, 2010) (supplyingcrash test ratings for vehicles); W.A.T.C.H. World Against Toys Causing Harm, http://www.toysafety.org (last visited Feb. 27, 2010) (reporting on toy safety). Other sources of safety information are websites of news outlets.
80. See, e.g., MOTOR TREND BUYER'S GUIDE, New Car Safety Ratings & Reports, http://www.motortrend.com/new-cars/safety-ratings/index.html (last visited Feb. 27, 2010) (reporting vehicle safety and crash test ratings)
81. NEW YORK TIMES, HEALTH NEWS, http://health.nytimes.com/pages/health (last visited Feb. 27, 2010) (supplying health care news, including articles on drug safety).
82. WALL STREET JOURNAL, Auto Industry News, http://online.wsj.com/public/ page/news-autos-automotive.html (last visited Feb. 27, 2010) (reviewing cars and motorcycles, including their safety). Additional sources of safety information about products are the websites of specialty organizations and user groups.
83. See, e.g., Aircraft Owners & Pilots Assoc. Air Safety Found., Safety Highlights, http://www.aopa.org/asf/publications/highlights.html (last visited Feb. 27, 2010) (providing aircraft reviews); CarGurus.com, http://www.cargurus. com (last visited Feb. 27, 2010) (evaluating new and used cars, including their safety); WebMD, Drugs & Medications A-Z, http://www.webmd.com/drugs/index- drugs.aspx? (last visited Feb. 27, 2010) (supplying safety information for over-the-counter and prescription drugs).
84. For example, the National Highway Traffic Safety Administration (NHTSA), the Consumer Product Safety Commission (CPSC), and the Food and Drug Administration (FDA) furnish safety information to the public about a broad range of products. See Nat'l Highway Traffic Safety Admin., http://www.safercar. gov (last visited Feb. 27, 2010) (providing ratings of tire safety, crash test results, rollover ratings, and a database of recalls); U.S. Consumer Prod. Safety Comm'n, CPSC Publications, http://www.cpsc.gov/cpscpub/pubs/pub-idx.html (last visited Feb. 27, 2010) (offering safety assessments of numerous products, including bicycles, children's furniture, and power equipment); U.S. Food & Drug Admin., Medical Product Safety Information, http://www.fda.gov/Safety/ Medwatch/SafetyInformation/default.htm (last visited Feb. 27, 2010) (supplying safety information about drugs approved by the FDA, as well as a list of medical device recalls).
85. See, e.g., Christine Jolls, Cass R. Sunstein & Richard Thaler, A Behavioral Approach to Law and Economics, 50 STAN. L. REV. 1471, 1476-1481 (1998) (discussing common cognitive biases).
86. Matthew Rabin, Psychology and Economics, 36 J. ECON. LITERATURE 11, 24-31 (1998) (same).
87. See generally JUDGMENT UNDER UNCERTAINTY: HEURISTICS AND BIASES (Daniel Kahneman, Paul Slovic & Amos Tversky eds., 1982). When individuals misperceive risks, they sometimes underestimate and sometimes overestimate them.
88. See, e.g., Sarah Lichtenstein et al., Judged Frequency of Lethal Events, 4 J. EXPERIMENTAL PSYCHOL. 551 (1978) (reporting that individuals systematically overestimate the frequency of death from unlikely events and underestimate the frequency of death from likely causes).
89. Paul Slovic, Baruch Fischhoff & Sarah Lichtenstein, Facts and Fears: Understanding Perceived Risk, in SOCIETAL RISK ASSESSMENT 181, 193 tbl.3 (Richard C. Schwing & Walter A. Albers, Jr. eds., 1980) (finding that individuals accurately predicted the number of annual fatalities due to home appliances, underestimated those due to X-rays, and overestimated the danger of vaccinations).
90. Michael S. Wogalter, Douglas J. Brems & Elaine G. Martin, Risk Perception of Common Consumer Products: Judgments of Accident Frequency and Precautionary Intent, 24 J. SAFETY RES. 97, 100 (1993) (reporting that individuals overestimate low-probability product risks and underestimate high-probability product risks).
91. See supra notes 13 and 16.
92. See generally STEPHEN BREYER, REGULATION AND ITS REFORM 96-119 (1982).
93. CASS R SUNSTEIN, RISK AND REASON (2002).
94. W. KIP VISCUSI, JOSEPH E. HARRINGTON, JR. & JOHN M. VERNON, ECONOMICS OF REGULATION AND ANTITRUST 789-826 (4th ed. 2005).
95. See ROBERT W. CRANDALL ET AL., REGULATING THE AUTOMOBILE 34 tbl.3-2 (1986).
96. Murray Weidenbaum, Regulation of the Automobile: Extensive and Growing, EXECUTIVE SPEECHES, Dec. 1998-Jan. 1999, at 14. On the specific requirements mentioned in the text, see 49 C.F.R. § 571.109 (2008) for regulations on tire strength, endurance, and dimensions; §§ 571.201-.224 for regulations on crashworthiness, including seat belt and windshield mounting requirements; and §§ 571.301-.304 for regulations on fuel system integrity and fire prevention.
97. See 49 U.S.C. §§ 322, 30111 (2006) (granting Secretary of Transportation power to prescribe motor vehicle safety standards); 49 C.F.R. § 1.50 (delegating authority to NHTSA Administrator); see also 49 U.S.C. § 30166 (granting Secretary of Transportation authority to conduct inspections and investigations as necessary to enforce motor vehicle safety regulations). For a detailed account of the development of NHTSA, see JERRY L. MASHAW & DAVID L. HARFST, THE STRUGGLE FOR AUTO SAFETY (1990).
98. DEP'T OF TRANSP., FISCAL YEAR 2010 BUDGET HIGHLIGHTS 18 (2009), http://www.dot.gov/budget/2010/bib2010.pdf.
99. 49 U.S.C. § 30165(a)(1) (authorizing financial penalties of up to $5000 per violation).
100. Id. § 30170(a) (authorizing an imprisonment sentence of up to fifteen years for falsifying or withholding information relating to motor vehicle safety violations that cause death or serious bodily injury).
101. See FDA REGULATORY AFFAIRS: A GUIDE FOR PRESCRIPTION DRUGS, MEDICAL DEVICES, AND BIOLOGICS (Douglas J. Pisano & David Mantus eds., 2004).
102. SUZANNE PARISIAN, FDA: INSIDE AND OUT (2001); U.S. Food & Drug Admin., Legislation, http://www.fda.gov/RegulatoryInformation/Legislation/ default.htm (last visited Feb. 27, 2010).
103. see also ARTHUR A. DAEMMRICH, PHARMACOPOLITICS: DRUG REGULATION IN THE UNITED STATES AND GERMANY (2004).
104. U.S. FOOD & DRUG ADMIN., FISCAL YEAR 2010 CONGRESSIONAL JUSTIFICATION 77 (2009), available at http://www.fda.gov/AboutFDA/ReportsManualsForms/ Reports/BudgetReports/ucm153374.htm.
105. See BERT SPILKER, GUIDE TO CLINICAL TRIALS xxii-xxiii (1991); Nat'l Insts. of Health, Understanding Clinical Trials, http://www.nlm.nih.gov/ services/ctphases.html (last visited Feb. 27, 2010).
106. see also Brian Vastag, New Clinical Trials Policy at FDA, 24 NATURE BIOTECHNOLOGY 1043, 1043 (2006).
107. See, e.g., Requirements on Content and Format of Labeling for Human Prescription Drug and Biological Products, 71 Fed. Reg. 3922 (Jan. 24, 2006) (codified at 21 C.F.R. pts. 201, 314, 601 (2009)) (reviewing and amending FDA regulations governing labeling requirements for prescription drug products).
108. 21 U.S.C. § 333(b) (2006) (authorizing maximum fines ranging from $250,000 to $1,000,000 and imprisonment for up to ten years).
109. See 14 C.F.R. § 21.6 (2009) (requiring manufacturers of aircraft, aircraft engines, or propellers to obtain a special "type certificate"); id. §§ 21.121-.165 (requiring manufacturers operating under type or production certificates to set up inspection, quality control, and testing systems).
110. See id. §§ 43.1-.17 (requiring detailed inspection and maintenance records and that inspection and maintenance operations be performed by FAA-certified mechanics, repairmen, or air carrier operators).
111. See id. §§ 23.1-39.27 (setting out detailed airworthiness requirements, including provisions for structure, weight distribution, speed, performance, roll and stability, force and torque limits, mechanics, and control systems); see also Fed. Aviation Admin., Airworthiness Directives, http://www.airweb.faa.gov/Regulatory-and-Guidance-Library/rgAD.nsf/Frameset? OpenPage (last visited Feb. 27, 2010) (collecting airworthiness directives requiring special provisions for particular aircraft and parts).
112. 49 U.S.C. § 1132(a)(1)(A) (2006) (requiring NTSB to investigate each accident involving civil aircraft); Nat'l Transp. Safety Bd., History and Mission, http://www.ntsb.gov/Abt-NTSB/history.htm (last visited Feb. 27, 2010) (noting NTSB's mission to investigate all U.S. civil aviation accidents).
113. See 14 C.F.R. §§ 13.13-.29 (providing various enforcement measures for violations of FAA regulations).
114. Consumer Product Safety Act, Pub. L. No.92-573, § 2(b)(1), 86 Stat. 1207, 1208 (1972) (codified at 15 U.S.C. § 2051(b)(1) (2006)) (establishing the Consumer Product Safety Commission). For a list of more than 15,000 consumer products regulated by the CPSC, see U.S. Consumer Prod. Safety Comm'n, Regulated Products, http://www.cpsc.gov/businfo/reg1.html (last visited Feb. 27, 2010).
115. 15 U.S.C. § 2069 (providing for civil penalties).
116. Id. § 2071 (providing for injunctive enforcement and seizure upon action brought by the Commission).
117. See, e.g., CRANDALL ET AL., supra note 36, at 51, 55-68 (conducting statistical analysis in order to estimate the influence of automobile safety regulation and finding "a very large effect of the improved safety design of automobiles since 1966 upon occupant death rates," id. at 66).
118. John D. Graham, Product Liability and Motor Vehicle Safety, in THE LIABILITY MAZE 120, 182-183 (Peter W. Huber & Robert E. Litan eds., 1991) (finding NHTSA regulation to be a main factor contributing to a decrease in motor vehicle fatalities).
119. Lloyd D. Orr, The Effectiveness of Automobile Safety Regulation: Evidence from the FARS Data, 74 AM. J. PUB. HEALTH 1384, 1387 (1984) (analyzing data from the Fatal Accident Reporting System for the years 1975 through 1978 and concluding that as many as 9,200 lives were saved by new automobile regulations).
120. See U.S. GEN. ACCOUNTING OFFICE, GENERAL AVIATION 8-9, 56-61 (2001) (reviewing numerous FAA initiatives that improve general aviation safety); Aircraft Owners & Pilots Assoc., Learn To Fly: Is It Safe?, http://flighttraining.aopa.org/learntofly/safe/index.html (last visited Feb. 27, 2010) (reviewing various factors, including FAA regulations, contributing to the decline in the accident rate per flying hour since 1950).
121. See U.S. Consumer Prod. Safety Comm'n, Success Stories Index, http://www.cpsc.gov/cpscpub/pubs/success/index.html (last visited Feb. 27, 2010) (describing the safety benefits of regulations concerning, for example, cigarette lighters, cribs, hair dryers, and bicycles).
122. See, e.g., Michael E. Levine, Regulatory Capture, in 3 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 267 (Peter Newman ed., 1998).
123. Richard A. Posner, Theories of Economic Regulation, 5 BELL J. ECON. & MGMT. SCI. 335 (1974) (reviewing versions of capture theory).
124. Robert D. Tollison, Regulation and Interest Groups, in REGULATION 59 (Jack High ed., 1991).
125. See, e.g., STEPHEN BREYER, BREAKING THE VICIOUS CIRCLE: TOWARD EFFECTIVE RISK REGULATION 12-14 (1993) (discussing the limited efficacy of asbestos cleanup regulation).
126. W. Kip Viscusi, Consumer Behavior and the Safety Effects of Product Safety Regulation, 28 J.L. & ECON. 527, 531 (1985) ("The impact of current CPSC regulations is likely to be quite small, and even if the agency were much more active than it now is, it is doubtful whether there would be a dramatic impact on product safety. The absence of any stark shift in product safety after the advent of the CPSC is borne out by the accident trend data ⋯.").
127. See generally RESTATEMENT (THIRD), supra note 1, § 2
128. DOBBS, supra note 1, § 355, at 910-17
129. OWEN, supra note 1, § 1.3, 7.1-9.6, at 23-48, 432-620.
130. Design defect occurs when "the manufacturer's design specifications ⋯ themselves create unreasonable risks ⋯. [T]he test is whether a reasonable alternative design would, at a reasonable cost, have reduced the foreseeable risks of harm posed by the product and, if so, whether the omission of the alternative design ⋯ rendered the product not reasonably safe." RESTATEMENT (THIRD), supra note 1, § 2 cmt. d.
131. see also RESTATEMENT (SECOND), supra note 1, § 398 (manufacturer is liable "for physical harm caused by his failure to exercise reasonable care in the adoption of a safe plan or design"). "[A] design defect occurs when the intended design of the product line itself is inadequate and needlessly dangerous." DOBBS, supra note 1, § 355, at 980. Because design defect cases concern an entire product line, if a defect is found, then "every unit in the same product line is potentially defective" and the manufacturer is liable for harms caused by all products in the line. RESTATEMENT (THIRD), supra note 1, § 1 cmt. a.
132. See RESTATEMENT (SECOND), supra note 1, § 395 ("A manufacturer who fails to exercise reasonable care in the manufacture of a chattel ⋯ is subject to liability for physical harm caused to [those who are injured] by its lawful use in a manner and for a purpose for which it is supplied."). The Restatement (Third) defines a manufacturing defect as "a depart[ure] from [the product's] intended design even though all possible care was exercised in the preparation and marketing of the product." RESTATEMENT (THIRD), supra note 1, § 2(a). A manufacturing deted is a "flaw in the manufacturing process, resulting in a product that differs from the manufacturer's intended result." Brown v. Superior Court, 751 P.2d 470, 474 (Cal. 1988). Unlike a design defect, a manufacturing defect "is a random failing or imperfection." DOBBS, supra note 1, § 355, at 979. Common examples include "products that are physically flawed, damaged, or incorrectly assembled." RESTATEMENT (THIRD), supra note 1, § 2 cmt. c.
133. A product is deemed "defective because of inadequate instructions or warnings when the foreseeable risks of harm posed by the product could have been reduced or avoided by the provision of reasonable instructions or warnings by the seller or other distributor ⋯ and the omission of the instructions or warnings renders the product not reasonably safe." RESTATEMENT (THIRD), supra note 1, § 2(c); see also RESTATEMENT (SECOND), supra note 1, § 388 (holding manufacturers liable for "fail[ing] to exercise reasonable care to inform [those for whose use the chattel is supplied] of its dangerous condition or of the facts which make it likely to be dangerous").
134. See Joseph B. White, Car-Accident Deaths Fell in '08, WALL ST. J., Feb. 10, 2009, at D8 ("More recently, auto makers have been going beyond what the law requires, because that is what consumers are demanding. The increasing use of stability controls and antirollover systems is an example. Electronic stability controls will be mandated on new vehicles by 2012, but many new vehicles have this technology today").
135. Yet product liability will not necessarily be successful in taking up the slack left by market forces and regulation. Notably, in a product liability lawsuit a court might not recognize a safety precaution that is in fact cost-effective, such as the shield for lawnmowers. This possibility is plausible because the factor that would often lead the market and regulators to fail to recognize the value of a safety precaution - lack of information about its risk-reducing effects - might also lead a court to fail to recognize its value.
136. See George L. Priest, Products Liability Law and the Accident Rate, in LIABILITY: PERSPECTIVES AND POLICY 184, 187-194 (Robert E. Litan & Clifford Winston eds., 1988).
137. This qualification of Priest's study was made by DON DEWEES, DAVID DUFF & MICHAEL TREBILCOCK, EXPLORING THE DOMAIN OF ACCIDENT LAW 203, 205 (1996).
138. Dewees and his coauthors observe that "either accidents caused by defective products are a small percentage of all product-related accidents or the tort system has not significantly reduced defective product-related accidents, or both." Id. at 203.
139. General aviation aircraft are aircraft with a maximum seating capacity of fewer than twenty passengers that are not engaged in regularly scheduled airline operations. General Aviation Revitalization Act of 1994, Pub. L. No.103-298, § 2(c), 108 Stat. 1552, 1553 (codified at 49 U.S.C. § 40101 (2006)). There were 231,607 such aircraft in active use in 2007. GEN. AVIATION MFRS. ASS'N, 2008 GENERAL AVIATION STATISTICAL DATABOOK & INDUSTRY OUTLOOK 28 (2008), available at http://www.gama.aero/files/2008-general- aviation-statistical-databook-indust-499bodc37b.pdf. In 2008, general aviation aircraft accounted for approximately 44% of all aviation fatalities in the United States. See Nat'l Transp. Safety Bd., Aviation Accident Statistics, at tbl.1, http://www.ntsb.gov/aviation/stats.htm (last visited Feb. 27, 2010).
140. Andrew Craig, Product Liability and Safety in General Aviation, in THE LIABILITY MAZE, supra note 54, at 456.
141. Robert Martin, General Aviation Manufacturing: An Industry Under Siege, in THE LIABILITY MAZE, supra note 54, at 478.
142. Martin, supra note 69, at 484-485 (reporting that the aviation industry's costs for defending against and paying product liability claims rose from $24 million in 1976 to $210 million in 1986).
143. see also Craig, supra note 69, at 457 (observing that liability costs per fatality rose from about $17,000 in 1977 to about $223,600 in 1985).
144. Martin used regression analysis to estimate the trend in fatal accident rates for general aviation from 1950-1969, when aircraft manufacturers were not subject to strict liability, and from 1970-1989, when a strict liability regime was in place. See Martin, supra note 69, at 494 fig.13-1. He observed that "[Figure 13-1] displays a sharp downward trend for the twenty years that were free of the influence of strict liability, in contrast to a significantly flatter downward trend in the accident rate over the twenty years after the intervention of strict liability and the litigation it has spawned." Id. at 493.
145. see also Craig, supra note 69, at 457-458
146. Craig, supra note 69, at 457 ("Clearly, therefore, the aggregate accident and liability cost data do not support the view that liability litigation has enhanced safety in this industry.").
147. Martin, supra note 69, at 493 ("These data indicate that strict liability has demonstrated no tendency to promote the safety of flight ⋯.").
148. see also Randy A. Nelson & James N. Drews, Strict Product Liability and Safety: Evidence from the General Aviation Market, 46 ECON. INQUIRY 425, 436 (2008) (finding that strict product liability actually increased the accident rate of general aviation aircraft because it depressed sales of new planes and led individuals to fly older and more dangerous planes).
149. Graham, supra note 54, at 183, 186-187
150. To be precise, Graham found that higher liability was positively associated with a higher accident rate, but the effect was not statistically significant. Id. at 182-183
151. Id. at 128-137
152. Id. at 137-144
153. Id. at 144-155
154. Id. at 155-168
155. Id. at 168-180
156. See id. at 135-37, 155, 163-64, 166, 178-180
157. Pinto-related injuries generated significant media attention and negative publicity for Ford. Id. at 132, 136. After learning about the Pinto problems, the NHTSA opened a formal investigation, id. at 132-34, and in 1977 it instituted stricter fuel tank standards, id. at 136. Ford also voluntarily modified the fuel tanks of pre-1977 Pintos not covered by the new requirements. It did so even though, at the time, such behavior might have been seen as an admission of guilt and could have led to greater liability, suggesting that its safety improvements were motivated by factors other than the threat of tort liability. Id. at 135-136
158. Id. at 180 ("In no case did we conclude that liability considerations were necessary to stimulate a specific safety improvement. In other words, other factors would eventually have led to the safety improvement."); id. at 181 tbl.4-3.
159. Id. at 181 tbl.4-3 (identifying instances in which liability was a "sufficient condition" or a "contributory factor" for a safety improvement).
160. Id. at 180-182
161. Richard L. Manning, Changing Rules in Tort Law and the Market for Childhood Vaccines, 37 J.L. & ECON. 247 (1994).
162. Id. at 258, 259 tbl.3.
163. Id. at 259 ("[T]he DPT vaccine currently in use in this country is essentially the same today as it has been for many years.").
164. Two other statistical studies are Richard S. Higgins, Producers' Liability and Product-Related Accidents, 7 J. LEGAL STUD. 299 (1978).
165. Paul H. Rubin & Joanna M. Shepherd, Tort Reform and Accidental Deaths, 50 J.L. & ECON. 221 (2007). Higgins's results do not have a clear meaning; he finds that product liability increases the home accident fatality rate in states with high levels of education but reduces it in states with low levels of education.
166. See Higgins, supra, at 320. Rubin and Shepherd's results support the view that product liability does not enhance safety; they find that product liability increases accidental deaths by raising the prices of safety-enhancing goods and services and thereby reducing their use. See Rubin & Shepherd, supra, at 222.
167. See DEWEES, DUFF & TREBILCOCK, supra note 66, at 202-203, 205.
168. Mark A. Geistfeld, Products Liability, in TORT LAW AND ECONOMICS § 11.11, at 301-304 (Michael Faure ed., 2d ed. 2009).
169. Daniel P. Kessler & Daniel L. Rubinfeld, Empirical Study of the Civil Justice System, in 1 HANDBOOK OF LAW AND ECONOMICS 343, 363 (A. Mitchell Polinsky & Steven Shavell eds., 2007). Two of these surveys also discuss some studies of reports by executives about their responses to product liability.
170. See DEWEES, DUFF & TREBILCOCK, supra note 66, at 197-98; Geistfeld, supra, at 303. We do not consider these studies because they do not examine how product liability affects actual accident rates.
171. Dewees, Duff, and Trebilcock question the import of the Priest study for the reasons observed on p. 1455, though they conclude that "[aggregated empirical analysis ⋯ suggests that increased product liability has not led to any decrease in product-related accidents." DEWEES, DUFF & TREBILCOCK, supra note 66, at 205. Geistfeld makes critical comments about the studies that he reviews, including Priest, supra note 65
172. Graham, supra note 54
173. Higgins, supra note 88
174. and Rubin & Shepherd, supra note 88
175. but he does not discuss the industry studies of Craig, supra note 69
176. Martin, supra note 69
177. and Manning, supra note 85.
178. See Geistfeld, supra note 89, § 11.11, at 301-04. Kessler and Rubinfeld, after discussing Priest and Martin, observe that "this work is only suggestive, since many other determinants of the accident rate (such as regulatory policy) may have been changing contemporaneously with aggregate trends in products liability pressure." Kessler & Rubinfeld, supra note 89, at 363.
179. Whereas in this section we have considered the effect of product liability on accident rates, others have examined the influence of product liability on innovation, liability insurance premiums, product prices, product availability, and international competitiveness. See DEWEES, DUFF & TREBILCOCK, supra note 66, at 197-205.
180. Kessler & Rubinfeld, supra note 89, at 363.
181. Robert E. Litan, The Safety and Innovation Effects of U.S. Liability Law: The Evidence, 81 AM. ECON. REV. 59 (1991).
182. See Steven Shavell, Strict Liability Versus Negligence, 9 J. LEGAL STUD. 1, 12-17, 20-22 (1980).
183. Michael Spence, Consumer Misperceptions, Product Failure and Producer Liability, 44 REV. ECON. STUD. 561 (1977).
184. In order to isolate the effects of first-party accident insurance, we assume in this section that consumers have perfect information about product risks. More realistically, of course, the effects of consumer misperceptions and first-party insurance will operate simultaneously.
185. The distortion of purchase decisions due to first-party accident insurance was first thoroughly analyzed by Jon D. Hanson & Kyle D. Logue, The First-Party Insurance Externality: An Economic Justification for Enterprise Liability, 76 CORNELL L. REV. 129, 159-168 (1990).
186. Id. at 171.
187. This statement presumes that consumers do not collect the $1 of liability payments under product liability. That could be the case if these payments are obtained by consumers' first-party insurers under subrogation arrangements (which we discuss in section IV.B). If subrogation were not applicable, then the effective price of the product would be too low, even with product liability.
188. See infra note 125 and accompanying text.
189. See TILLINGHAST-TOWERS PERRIN, U.S. TORT COSTS: 2002 UPDATE 17 fig. (2002) (indicating that awards for noneconomic losses slightly exceed those for economic losses).
190. See CARMEN DENAVAS-WALT, BERNADETTE D. PROCTOR & JESSICA C. SMITH, U.S. CENSUS BUREAU, INCOME, POVERTY, AND HEALTH INSURANCE COVERAGE IN THE UNITED STATES: 2007, at 21 fig.7 (2008), available at http://www.census.gov/prod/ 2008pubs/p60235.pdf (showing that 15.3% of the population has no health insurance). The 85% figure is probably an underestimate of the true percentage of the population that has health insurance. Id. at 59-60.
191. See AM. COUNCIL OF LIFE INSURERS, LIFE INSURERS FACT BOOK: 2008, at 61 (2008) (citing 2004 data).
192. See BUREAU OF LABOR STATISTICS, U.S. DEP'T OF LABOR, NATIONAL COMPENSATION SURVEY: EMPLOYEE BENEFITS IN THE UNITED STATES, MARCH 2008, Civilian Industry Tables, tbl.12 (2008), available at http://www.bls.gov/ncs/ ebs/benefits/2008/ebbl0041.pdf.
193. See Ins. Info. Inst., Homeowners Insurance: Expenditures for Homeowners and Renters Insurance, http://www.iii.org/media/facts/statsbyissue/homeowners (last visited Feb. 27, 2010) (citing 2006 data). Additionally, 43% of renters had renters insurance. Id.
194. Casualty losses can be deducted to the extent that they exceed 10% of adjusted gross income. See 26 U.S.C. § 165(h)(2) (2006). Unreimbursed medical expenses can be deducted to the extent that they exceed 7.5% of adjusted gross income. See id. § 213(a).
195. For example, if a person incurs a $100,000 loss but obtains a tax benefit worth $25,000 due to the deductibility of the loss, it is as if the person were covered by a $25,000 insurance policy. See Louis Kaplow, The Income Tax as Insurance: The Casualty Loss and Medical Expense Deductions and the Exclusion of Medical Insurance Premiums, 79 CAL. L. REV. 1485 (1991).
196. Subrogation is explained by Allan D. Windt: [T]he [insurance] company is ordinarily entitled, on making a payment to or on behalf of the insured ⋯ to step into the shoes of the insured and assert any cause of action against a third party that the insured could have asserted for his or her own benefit had the insured not been compensated by the insurer ⋯. Moreover, the insurer should be entitled to sue only for an amount of money necessary to make it whole ⋯. The insurer should not ⋯ be able to recover for damages incurred by the insured in excess of the amount that the insured was paid by the insurer. ALLAN D. WINDT, INSURANCE CLAIMS AND DISPUTES: REPRESENTATION OF INSURANCE COMPANIES AND INSUREDS § 10:5, at 10-24 (5th ed. 2007) (footnotes omitted).
197. See generally TOM BAKER, INSURANCE LAW AND POLICY 391-407 (2003).
198. See KENNETH S. ABRAHAM, INSURANCE LAW AND REGULATION 244-245 (4th ed. 2005).
199. Alan O. Sykes, Subrogation and Insolvency, 30 J. LEGAL STUD. 383, 383-384 (2001).
200. See ABRAHAM, supra note 106, at 405; Sykes, supra note 106, at 383-384
201. This outcome - that the victim is made whole before the insurer retains any part of a settlement or judgment - is the most common of the three possibilities that we discuss. See ABRAHAM, supra note 106, at 405-07; Sykes, supra note 106, at 385.
202. We have discussed the possible outcomes when the settlement, $75,000, is between the insurance coverage of $60,000 and the loss of $100,000. Another situation arises when the settlement is less than the insurance coverage of $60,000 - say it is $50,000. Then there are three possibilities analogous to those mentioned in the text. Specifically, the plaintiff may receive $40,000 of the settlement, making her whole, and the insurer will receive the remaining $10,000; the insurer may receive the entire $50,000 settlement, making it as whole as possible; or the plaintiff and the insurer may share the settlement in some intermediate way.
203. An exception occurs in the following circumstances. Suppose that a settlement is low, such that the sum of the settlement and the victim's insurance coverage is less than the victim's loss. Then if the principle that the victim should be made whole before the insurer obtains any part of a settlement or judgment is applicable, the entire settlement would be retained by the victim.
204. Subrogation does benefit individuals indirectly through lower insurance premiums (because subrogation provides insurers with additional revenue). But lower insurance premiums do not result in an increase in compensation in the event of an accident.
205. According to Deborah Hensler et al., 87% of tort liability claimants who retained an attorney entered into a contingency fee arrangement to cover legal fees. DEBORAH R. HENSLER ET AL., RAND INST. FOR CIVIL JUSTICE, COMPENSATION FOR ACCIDENTAL INJURIES IN THE UNITED STATES 135-136 & tbl.5.11 (1991), available at http://www.rand.org/pubs/reports/2006/R3999.pdf. We assume that the percentage for product liability suits is not significantly different.
206. See id. at 136 (finding that the median fixed contingency fee paid is 33% and that the median adjusted contingency fee paid is between 25% and 33%).
207. see also Herbert M. Kritzer, The Wages of Risk: The Returns of Contingency Fee Legal Practice, 47 DEPAUL L. REV. 267, 286 (1998) (observing that the contingency fee paid in the vast majority of fixed contingency fee arrangements is 33% and that the contingency fee paid in adjusted contingency fee arrangements is usually 25% if the case does not involve substantial trial preparation and 33% if it does).
208. See Theodore Eisenberg & Geoffrey P. Miller, Attorney Fees in Class Action Settlements: An Empirical Study, 1 J. EMPIRICAL LEGAL STUD. 27, 51 tbl.1 (2004) (finding that the mean fee rate for tort class action lawsuits is 17.9%).
209. In a study of 1452 closed malpractice claims from five liability insurers, the average time between the injury and the closure of the claim was five years. See David M. Studdert et al., Claims, Errors, and Compensation Payments in Medical Malpractice Litigation, 354 NEW ENG. J. MED. 2024, 2026 (2006), available at http://content.nejm.org/cgi/content/full/354/19/2024. For tort suits in general, claims take an average of 21 months to process if there is a bench trial, and 26.5 months if there is a jury trial. LYNN LANGTON & THOMAS H. COHEN, U.S. DEP'T OF JUSTICE, CIVIL BENCH AND JURY TRIALS IN STATE COURTS, 2005, at 8 tbl.9 (rev. Apr. 9, 2009), available at http://www.ojp.usdoj. gov/bjs/pub/pdf/cbjtsc05.pdf.
210. See, e.g., 4 MATTHEW BENDER, DAMAGES IN TORT ACTIONS § 39.01 (2009) ("[M]any states continue to limit interest in [wrongful death and personal injury actions] to post-judgment interest ⋯.").
211. Michael S. Knoll, A Primer on Prejudgment Interest, 75 TEX. L. REV. 293, 297 (1996) ("[T]he requirement that a losing defendant pay prejudgment interest to a successful plaintiff remains far from universal."). Some states have begun to reform their laws to permit recovery of prejudgment interest.
212. See Am. Tort Reform Ass'n, Prejudgment Interest Reform, http://www.atra.org/issues/index.php?issue = 7492 (last visited Feb. 27, 2010) (cataloging state reform efforts).
213. Individuals will have to pay for compensation provided through the product liability system in the form of higher product prices, and they will benefit indirectly from this compensation in the form of lower first-party insurance premiums (as a result of subrogation). Therefore, the net value to individuals of compensation due to product liability equals the direct value of the compensation to them, less the increase in product prices, plus the reduction in first-party insurance premiums. It is the net value of compensation that enters into the benefit-cost calculus. (Because we examine litigation costs in Part V, we do not consider price increases due to litigation costs here.)
214. In economic terms, because of the declining marginal utility of money, the marginal utility of product liability-related dollars is less than the marginal utility of insurance-related dollars.
215. The individual would receive $40,000 as a result of product liability if her judgment were $100,000 and her insurance policy included a subrogation provision. For then the insurer would obtain $60,000 of the judgment and she would retain $40,000.
216. Let U(·) represent the utility to an individual of her wealth. To calculate the dollar equivalent, b, of the benefit from $60,000 of insurance coverage, we solve .99U($200,ooo - b) + .01U($160,000 - b) = .99U($200,000) + .01U($100,000). Note that this equation means that the individual is indifferent between paying b for the coverage and not having coverage (if b were lower than that satisfying the equation, the individual would be better off with the coverage than not, so b would not be her willingness to pay for the coverage). We employ the constant relative risk aversion utility function U(y) = y1-y(1 - y), where y is an individual's wealth and y is the coefficient of relative risk aversion. We assume that y is 2, which is consistent with economists' estimates of y. See, e.g., Syngjoo Choi et al., Consistency and Heterogeneity of Individual Behavior Under Uncertainty, 97 AM. ECON. REV. 1921, 1931 (2007).
217. Martin L. Weitzman, Subjective Expectations and Asset-Return Puzzles, 97 AM. ECON. REV. 1102, 1103 (2007). Solving for b in the equation above, we obtain b = $1480.52. Similarly, to obtain the dollar equivalent of the benefit of the next $40,000 of coverage provided by the liability system, we solve U($200,000 - $600 - b) = .99U($200,000 - $600) + .01U($160,000 - $600) (the $600 figure represents the actuarially fair premium for the $60,000 of insurance coverage), which results in b = $499.12.
218. See John C. Coffee, Jr., Class Action Accountability: Reconciling Exit, Voice, and Loyalty in Representative Litigation, 100 COLUM. L. REV. 370, 417 (2000) ("[T]he traditional class action aggregates small claims that are individually uneconomical to litigate."). In the 1997 case of Amchen Products, the Supreme Court wrote: "The policy at the very core of the class action mechanism is to overcome the problem that small recoveries do not provide the incentive for any individual to bring a solo action prosecuting his or her rights. A class action solves this problem by aggregating the relatively paltry potential recoveries into something worth someone's (usually an attorney's) labor." Amchem Prods., Inc. v. Windsor, 521 U.S. 591, 617 (1997) (quoting Mace v. Van Ru Credit Corp., 109 F.3d 338, 344 (7th Cir. 1997)) (internal quotation marks omitted).
219. Assume, as in the previous example, that the probability of a loss occurring is one percent and that the individual's initial wealth is $200,000. Then the dollar equivalent, b, of the benefit from $100 of compensation in the event of a loss is calculated by solving U($200,000 - b) = .99U($200,000) + .01U($199,900). Using the utility function discussed supra note 120 results in b = $1.0005.
220. Similarly, an injury to a person that causes significant discomfort, say a broken wrist, would not be expected to create financial needs beyond the cost of medical treatment and possibly the replacement of lost income. The point is that pain and suffering per se do not usually enhance the need for money.
221. Let L represent the utility loss from pain and suffering. Assume that an individual's assets are $200,000 and that she is purchasing a good, say an automobile, that would cost $30,000 if there were no pain and suffering awards and $31,000 if there were (the higher price is due to the manufacturer's liability cost for pain and suffering of $1,000 = 1% × $100,000). The amount, w, by which she is made worse off as a result of receiving compensation for pain and suffering and having to pay $31,000 for the automobile as a result is determined by the following equation: U($170,000 - w) - .01L = .99U($169,000) + .01U($269,000) - .01L. The left-hand side of the equation is, aside from w, her expected utility if she pays $30,000 for the automobile and does not receive pain and suffering damages in the event of a product-related accident. The right-hand side is her expected utility if she pays $31,000 for the automobile and receives pain and suffering damages of $100,000 if an accident occurs. Using the utility function supra note 120 and solving for w yields w = $365.84.
222. See generally SHAVELL, supra note 7, at 228-31.
223. Kenneth J. Arrow, Optimal Insurance and Generalized Deductibles, 1974 SCANDINAVIAN ACTUARIAL J. 1.
224. Philip J. Cook & Daniel A. Graham, The Demand for Insurance and Protection: The Case of Irreplaceable Commodities, 91 Q.J. ECON. 143 (1977).
225. W. Kip Viscusi & William N. Evans, Utility Functions That Depend on Health Status: Estimates and Economic Implications, 80 AM. ECON. REV. 353 (1990).
226. Richard J. Zeckhauser, Coverage for Catastrophic Illness, 21 PUB. POL'Y 149 (1973).
227. But see Steven P. Croley & Jon D. Hanson, The Nonpecuniary Costs of Accidents: Pain-and-Suffering Damages in Tort Law, 108 HARV. L. REV. 1785 (1995) (arguing that individuals desire nonpecuniary damages and insurance).
228. See supra p. 1462.
229. See TILLINGHAST-TOWERS PERRIN, U.S. TORT COSTS: 2003 UPDATE 17 (2003) (victims receive $0.22 for economic losses and $0.24 for noneconomic losses). Subsequent reports do not state the amount obtained by plaintiffs per dollar spent by defendants.
230. See, e.g., TOWERS PERRIN, 2008 UPDATE ON U.S. TORT COST TRENDS (2008).
231. See JAMES S. KAKALIK & NICHOLAS M. PACE, RAND INST. FOR CIVIL JUSTICE, COSTS AND COMPENSATION PAID IN TORT LITIGATION ix tbl.S.3 (1986). The numbers reported in the text are based on the net compensation received by plaintiffs compared to the total expenditures on tort litigation, using the low and high estimates in Table S.3. Id.
232. JAMES S. KAKALIK ET AL., RAND INST. FOR CIVIL JUSTICE, COSTS OF ASBESTOS LITIGATION vii tbl.S.2 (1983).
233. STEPHEN J. CARROLL ET AL., RAND INST. FOR CIVIL JUSTICE, ASBESTOS LITIGATION 104 (2005).
234. Patricia M. Danzon, Liability for Medical Malpractice, in 1 HANDBOOK OF HEALTH ECONOMICS 1339, 1369 (A.J. Culyer & J.P. Newhouse eds., 2000).
235. His claim is that "[s]ixty cents of every dollar spent on malpractice liability insurance are absorbed by administrative and legal costs," which implies that only $0.40 would be left for victims. See HUBER, supra note 11, at 151.
236. See id.
237. Joni Hersch & W. Kip Viscusi, Tort Liability Litigation Costs for Commercial Claims, 9 AM. L. & ECON. REV. 330, 359 tbl.5 (2007).
238. For example, Hersch & Viscusi take only partial account of the administrative costs of liability insurers and exclude the value of the time of litigants and the costs of the judicial system. See id.
239. See supra pp. 1463-64.
240. We are assuming that the costs of the product liability system are comparable to those of the tort system generally.
241. See supra section III.A, pp. 1459-61.
242. For simplicity, we have been implicitly assuming in this paragraph that consumers correctly estimate their expected litigation costs. However, the point that litigation cost-related price increases cause consumer welfare losses also holds if consumers misperceive such costs. The only difference is that the magnitude of the welfare losses depends on the degree to which consumers underestimate or overestimate expected litigation costs. In the example in the text, we said that a consumer would add to the price of $11.40 the $0.40 of litigation costs that she would bear on average. But if the consumer underestimates expected litigation costs, she will add less than $0.40 to $11.40, so that the distortion due to litigation costs would be lessened. Conversely, if the consumer overestimates such costs, the distortion due to litigation costs would be exacerbated.
243. See supra pp. 1467-69.
244. See supra section II.C, pp. 1453-59.
245. See supra Part III, pp. 1459-62.
246. See supra section V.B, pp. 1470-72.
247. See supra Part IV, pp. 1462-69.
248. See supra Part V, pp. 1469-72.
249. To demonstrate this point, assume that the demand curve for a product is linear, P = a - bQ, where P is the price, Q is the quantity, and a and b are positive parameters. Let C be the cost per unit of production, H be the expected harm per unit, and λ be the degree of underestimation of risk (so consumers believe that the expected harm per unit is (1 - λ)H). Assume also that the parties' litigation costs equal the amount of money obtained by the plaintiff. See supra section V.A, pp. 1469-70. This implies that each party's litigation costs are (1/3)H (for then the plaintiff obtains (2/3)H after paying her litigation costs of (1/3)H, and the defendant incurs litigation costs of (1/3)H). Under these assumptions, the deadweight loss (the reduction in social welfare from its ideal level) in the absence of liability can be shown to be .5{[(a - C - (1 - λ)H)/b] - [(a - C - H)/b]}λH; this is the area of the triangle that is above the demand curve and below the price line a C + H, between the ideal consumption level and the higher level that occurs due to misperceptions. Similarly, the deadweight loss in the presence of liability is .5[(2 - λ)(H/3)/b][(2 - λ)(H/3)]; this is the area of the triangle that is below the demand curve and above the price line at C + H, between the ideal consumption level and the lower level that occurs due to the litigation cost-related price increase. Setting these two expressions equal to each other and solving for λ yields λ = .5. It follows that if λ is less than .5, the deadweight loss in the presence of liability exceeds the deadweight loss in the absence of liability. In other words, the price-signaling benefit is less than the litigation cost-related price distortion unless λ exceeds .5. Similarly, it can be shown that if consumers overestimate product risks, the price-signaling benefit is less than the litigation cost-related price distortion unless λ is less than -1, that is, unless the perceived risk is more than double the actual risk.
250. See supra section II.A, pp. 1443-50.
251. See supra section III.B, pp. 1461-62.
252. Note, however, that this price distortion is the same one associated with the first point. The two price distortions are not additive.
253. See supra p. 1472.
254. See supra p. 1457.
255. Manning, supra note 85, at 273.
256. See Richard L. Manning, Is the Insurance Aspect of Producer Liability Valued by Consumers? Liability Changes and Childhood Vaccine Consumption, 13 J. RISK & UNCERTAINTY 37, 47 (1996). We are presuming that it is socially desirable for all children to be vaccinated, in part because pertussis and diphtheria are communicable diseases. Most states require immunization at school entry. Id. at 41.
257. See Manning, supra note 85, at 271.
258. See supra pp. 1450-51.
259. See Tomas J. Philipson & Eric Sun, Is the Food and Drug Administration Safe and Effective?, J. ECON. PERSP., Winter 2008, at 85, 94-95 (suggesting that the deadweight losses to consumers and producers from the price increases due to product liability litigation in the pharmaceutical industry are in the tens of billions of dollars).
260. See supra pp. 1455-56.
261. Sales of new airplanes by general aviation manufacturers declined from 17,811 units in 1978 to 1143 units a decade later, a decline of 93.5%. Martin, supra note 69, at 483. Manufacturers attributed the decline to price increases that had occurred as a result of enhanced product liability exposure. See General Aviation Accident Liability Standards Act of 1987: Hearing on S. 473 Before the Subcomm. on Aviation of the S. Comm. on Commerce, Science & Transportation, 100th Cong. 50 (1987) (statement of Robert Martin, attorney representing Beech Aircraft).
262. See DONALD M. PATTILLO, A HISTORY IN THE MAKING: 80 TURBULENT YEARS IN THE AMERICAN GENERAL AVIATION INDUSTRY 155 (1998) ("The Conquest I and II were the last of Cessna's once-extensive twin-engined line to remain in production, but all aircraft other than the Citation series and the Caravan were suspended indefinitely in May 1986."). The CEO of Cessna, Russ Meyer, said that Cessna's lightplane production would resume if a more favorable liability environment emerged.
263. Mark R. Twombly, Kill the Messenger, AOPA PILOT, Aug. 1993, at 125. After the General Aiation Revitalization Act passed in 1994, Meyer stated that Cessna would restart production of three single-engine aircraft models.
264. Thomas A. Horne, Manufacturers Face the Future, AOPA PILOT, Sept. 1994, at 5.
265. See Martin, supra note 69, at 482-83 (finding that from 1971 through 1976, Beech spent $18 million insuring and defending product liability claims, of which only about $3 million went to claimants).
266. DAVID G. OWEN, M. STUART MADDEN & MARY J. DAVIS, MADDEN & OWEN ON PRODUCTS LIABILITY § 1.4, at 9-14 (3d ed. 2000).
267. Steven P. Croley & Jon D. Hanson, Rescuing the Revolution: The Revived Case for Enterprise Liability, 91 MICH. L. REV. 683, 695-712 (1993).
268. George L. Priest, The Invention of Enterprise Liability: A Critical History of the Intellectual Foundations of Modern Tort Law, 14 J. LEGAL STUD. 461, 465-83 (1985).
269. William L. Prosser, The Fall of the Citadel (Strict Liability to the Consumer), 50 MINN. L. REV. 791, 791-800 (1966).
270. See generally James A. Henderson, Jr. & Theodore Eisenberg, The Quiet Revolution in Products Liability: An Empirical Study of Legal Change, 37 UCLA L. REV. 479, 480 (1990) ("This quiet revolution is a significant turn in the direction of judicial decision making away from extending the boundaries of products liability and toward placing significant limitations on plaintiffs' rights to recover in tort for product-related injuries.").
271. James A. Henderson, Jr. & Aaron D. Twerski, Closing the American Products Liability Frontier: The Rejection of Liability Without Defect, 66 N.Y.U. L. REV. 1263, 1271 & n.28 (1991) (listing examples of court decisions since the 1980s that have curtailed product liability).
272. 902 P.2d 54 (N.M. 1995).
273. Id. at 58 (quoting Beshada v. Johns-Manville Prods. Corp., 447 A.2d 539, 549 (N.J. 1982)).
274. see also Greenman v. Yuba Power Prods., Inc., 377 P.2d 897, 901 (Cal. 1963) ("The purpose of such liability is to insure that the costs of injuries resulting from defective products are borne by the manufacturers that put such products on the market rather than by the injured persons ⋯.").
275. Kemp v. Miller, 453 N.W.2d 872, 879 (Wis. 1990) ("[T]he risk of loss associated with the use of defective products should be borne by those who have created the risk and who have reaped the profit by placing a defective product in the stream of commerce."); RESTATEMENT (THIRD), supra note 1, § 2 reporters' notes cmt. a ("[T]he manufacturer should be strictly liable because it profits from its activity, which inevitably involves defect-caused harm to others.").
276. RESTATEMENT (SECOND), supra note 1, § 402A cmt. c ("[T]he justification for the strict liability has been said to be that the seller, by marketing his product for use and consumption, has undertaken and assumed a special responsibility toward any member of the consuming public who may be injured by it ⋯.").
277. See, e.g., RESTATEMENT (THIRD), supra note 1, § 2 cmt. a (mentioning disappointment of "reasonable expectations of product performance" as a fairness rationale).
278. 150 P.2d 436 (Cal. 1944).
279. Id. at 440-41 (Traynor, J., concurring).
280. There are two additional sentences bearing on deterrence that are summary in nature: "It is to the public interest to discourage the marketing of products having defects that are a menace to the public ⋯. It is to the public interest to prevent injury to the public from any defective goods by the imposition of civil liability generally." Id. at 441.
281. Id. at 443.
282. See supra pp. 1445-48. Of course, at the time of the Escola decision, television was in its infancy and the internet did not exist.
283. Justice Traynor in Escola does mention the section of the Health and Safety Code that "prohibits the manufacturing, preparing, compounding, packing, selling ⋯ of any adulterated food" and that imposes strict criminal liability on manufacturers. Escola, 150 P.2d at 441 (Traynor, J., concurring). He argues that this "public policy of protecting the public from dangerous products placed on the market" should be expanded beyond food products and containers. Id. Here Justice Traynor is using regulation as a justification for expanded product liability, not suggesting that regulation may be a substitute for product liability.
284. Justice Traynor did not even mention the safety rationale explicitly in Greenman v. Yuba Power Prods., Inc., 377 P.2d 897 (Cal. 1963), an influential product liability case.
285. No. 06-1481, 2008 WL 4425238 (E.D. Pa. Sept. 29, 2008).
286. *1, it did not consider this in assessing the need for liability.
287. See, e.g., All Alaskan Seafoods, Inc. v. Raychem Corp., 197 F.3d 992, 995 (9th Cir. 1999) (providing only a cursory treatment of the safety rationale for product liability and stating that "[p]roduct liability promotes safer products by placing responsibility on the manufacturer, which is the party most able to prevent harm"); Sindell v. Abbot Labs., 607 P.2d 924, 936 (Cal. 1980) (stating without elaboration that "[t]he manufacturer is in the best position to discover and guard against defects in its products and to warn of harmful effects; thus, holding it liable for defects and failure to warn of harmful effects will provide an incentive to product safety"); Bell v. Jet Wheel Blast, 462 So. 2d 166, 171 (La. 1985) (asserting that "in many instances the manufacturer would have no incentive to make and market a safer product" if its liability were reduced); Heath v. Sears, Roebuck & Co., 464 A.2d 288, 293 (N.H. 1983) (referring to deterrence in only one sentence, which claimed that "without the stimulus of plaintiffs' products liability actions, the incentive to improve products and make them safer would not exist').
288. Gantes v. Kason Corp., 679 A.2d 106, 112 (N.J. 1996) (claiming that the state's interest in product safety "is furthered through the recognition of claims and the imposition of liability based on principles of strict products-liability law"); Leichtamer v. Am. Motors Corp., 424 N.E.2d 568, 575 (Ohio 1981) (including only a single reference to product safety, the statement that "the public interest in human life and safety can best be protected by subjecting manufacturers of defective products to strict liability in tort when the products cause harm"); Dippel v. Sciano, 155 N.W.2d 55, 58 (Wis. 1967) (arguing that "the manufacturer has the greatest ability to control the risk created by his product since he may initiate or adopt inspection and quality control measures thereby preventing defective products from reaching the consumer"). There are, however, occasional opinions in which the reasoning about deterrence is not conclusory because they discuss whether imposing liability would promote product safety in the particular circumstances.
289. See, e.g., McKay v. Rockwell Int'l Corp., 704 F.2d 444, 452 (9th Cir. 1983) (arguing that imposing liability would not be likely to foster product safety because market forces already accomplish this - the plaintiff, a purchaser of military equipment, is knowledgeable and would not buy dangerous products); Queen City Terminals, Inc. v. Gen. Am. Transp. Corp., 653 N.E.2d 661, 672 (Ohio 1995) (explaining that product liability does not promote product safety when buyers are knowledgeable about product risks and specify the design of the product).
290. We have found three passages on deterrence in the Restatement (Third): "On the premise that tort law serves the instrumental function of creating safety incentives, imposing strict liability on manufacturers for harm caused by manufacturing defects encourages greater investment in product safety ⋯." RESTATEMENT (THIRD), supra note 1, § 2 cmt. a. "Subsections (b) and (c), which impose liability for products that are defectively designed or sold without adequate warnings or instructions ⋯ achieve the same general objectives as does liability predicated on negligence. The emphasis is on creating incentives for manufacturers to achieve optimal levels of safety in designing and marketing products." Id. "Strict liability for harm caused by manufacturing defects has been supported on the ground that it promotes investment in product safety." Id. § 2 reporters' note cmt. a.
291. The Restatement (Second) states that a justification for strict liability is that "the consumer of such products is entitled to the maximum of protection at the hands of someone, and the proper persons to afford it are those who market the products." RESTATEMENT (SECOND), supra note 1, § 402A cmt. c. A full reading of comment c suggests that the quoted statement refers to the safety rationale for product liability.
292. 770 F.2d 556 (5th Cir. 1985).
293. Id. at 571.
294. But see McKay, 704 F.2d at 452 (observing that prices will beneficially discourage consumers from buying risky products only if consumers underestimate product risks).
295. See, e.g., LaRosa v. Superior Court, 176 Cal. Rptr. 224, 233 (App. Dep't Super. Ct. 1981) (recognizing the principle, though not finding it applicable to the case at issue, that a firm "will pass the costs of injuries along to the consumer in the form of increased prices for more dangerous products and that the consumer will be more likely to buy safer goods because they will be relatively less expensive"); Belle Bonfils Mem'l Blood Bank v. Hansen, 665 P.2d 118, 122 n.7 (Colo. 1983) ("Enterprise liability assumes that a product's market price ought to include the cost of accidents caused by defects in the product, and that consumer demand will shift accordingly to safer substitutes.").
296. See RESTATEMENT (THIRD), supra note 1, § 2 cmt. a ("Some courts and commentators also have said that strict liability discourages the consumption of defective products by causing the purchase price of products to reflect, more than would a rule of negligence, the cost of defects.").
297. Id. § 2 reporters' note cmt. a. There is no discussion of the price-signaling rationale for product liability in the RESTATEMENT (SECOND), supra note 1.
298. Escola v. Coca Cola Bottling Co., 150 P.2d 436, 441 (Cal. 1944) (Traynor, J., concurring). Justice Traynor also observes that the cost to the manufacturer of providing this implicit insurance can, through higher product prices, be "distributed among the public as a cost of doing business." Id. This is true, but it is a very expensive form of insurance for individuals. Our discussion of litigation costs implies that consumers effectively pay premiums (in the form of higher product prices and the litigation costs that they bear) of approximately twice their expected benefits. See supra section V.A, pp. 1469-70.
299. See supra pp. 1467-69. This omission is not surprising because the point at issue was not developed until after the Escola opinion.
300. Courts typically devote only a sentence to this topic (if they even mention it). See, e.g., All Alaskan Seafoods, Inc. v. Raychem Corp., 197 F.3d 992, 995 (9th Cir. 1999) ("Manufacturers can set prices to spread the risk of defects over the entire market for their products."); Sindell v. Abbot Labs., 607 P.2d 924, 936 (Cal. 1980) ("[T]he cost of an injury and the loss of time or health may be an overwhelming misfortune to the person injured, and a needless one, for the risk of injury can be insured by the manufacturer ⋯." (quoting Escola, 150 P.2d at 441 (Traynor, J., concurring))); Bell v. Jet Wheel Blast, 462 So. 2d 166, 171 (La. 1985) ("[One] basic goal[] of ⋯ strict products liability ⋯ [is] the placing of the burden of accidental injuries caused by defective products on those who market them, to be treated as a cost of production against which liability insurance can be obtained."); Queen City Terminals, Inc. v. Gen. Am. Transp. Corp., 653 N.E.2d 661, 672 (Ohio 1995) ("[M]anufacturers are in a better position to bear the costs of injuries, because they have the ability to 'distribute the losses of the few among the many who purchase the products' by charging higher prices." (citation omitted)); Blankenship v. Gen. Motors Corp., 406 S.E.2d 781, 784 (W. Va. 1991) ("[P]roduct liability is concerned with spreading the cost of inevitable accidents. Inherent in this cost-spreading function is the collection of what amounts to insurance premiums from all the purchasers of products ⋯." (footnote omitted)).
301. see also RESTATEMENT (THIRD), supra note 1, § 2 cmt. a ("[B]etween [sellers] and innocent victims who suffer harm because of defective products, the product sellers as business entities are in a better position than are individual users and consumers to insure against such losses."); RESTATEMENT (SECOND), supra note 1, § 402A cmt. c ("[P]ublic policy demands that the burden of accidental injuries caused by products intended for consumption be placed upon those who market them, and be treated as a cost of production against which liability insurance can be obtained ⋯."). But see McKay, 704 F.2d at 452 (recognizing that the plaintiff would receive generous compensation for his accident through the Veterans' Benefits Act).
302. His only mention of litigation costs concerns the comparison between a regime of product liability and a regime in which injured consumers sue retailers and retailers sue manufacturers (he describes the latter as "needlessly circuitous and engender[ing] wasteful litigation"). Escola, 150 P.2d at 442 (Traynor, J., concurring).
303. RESTATEMENT (THIRD), supra note 1, § 2 reporters' note cmt. a ("Another objective traditionally thought to be promoted by strict liability is the reduction of transaction costs, which include the costs of operating the accident reparation system.").
304. See, e.g., Bynum v. FMC Corp., 770 F.2d 556 (5th Cir. 1985); U.S. Airways v. Elliott Equip. Co., No. 06-1481, 2008 WL 4425238 (E.D. Pa. Sept. 29, 2008); Brooks v. Beech Aircraft Corp., 902 P.2d 54 (N.M. 1995). But see Torres v. Goodyear Tire & Rubber Co., 867 F.2d 1234, 1238-39 & n.4 (9th Cir. 1989) (recognizing the significance of legal costs and citing academic literature on their magnitude).
305. See, e.g., FOWLER V. HARPER & FLEMING JAMES, JR., THE LAW OF TORTS (1956)
306. WILLIAM L. PROSSER, HANDBOOK OF THE LAW OF TORTS (4th ed. 1971); Henderson & Eisenberg, supra note 162; Henderson & Twerski, supra note 162.
307. Fleming James, Jr., General-Products - Should Manufacturers Be Liable Without Negligence?, 24 TENN. L. REV. 923 (1957) [hereinafter James, General Products].
308. Fleming James, Jr. & John J. Dickinson, Accident Proneness and Accident Law, 63 HARV. L. REV. 769 (1950).
309. Page Keeton, Products Liability - Some Observations About Allocation of Risks, 64 MICH. L. REV. 1329 (1966) [hereinafter Keeton, Products Liability: Observations].
310. Page Keeton, Products Liability - The Nature and Extent of Strict Liability, 1964 U. ILL. L.F. 693 [hereinafter Keeton, Products Liability: Nature].
311. Prosser, supra note 161. Other traditional scholars of product liability include Robert E. Keeton, David G. Owen, Gary Schwartz, and Marshall Shapo.
312. See, e.g., James, General Products, supra note 189, at 923-24 (arguing that product liability is desirable because it spreads risks).
313. Priest, supra note 161, at 505 (describing Prosser's important role as Reporter of the Restatement (Second) of Torts, which adopted Section 402A, imposing liability on sellers for injuries from defective products); Prosser, supra note 161, at 799-800 (suggesting that strict product liability be adopted). Page Keeton and James Henderson appear to favor some form of product liability, although both are concerned about its proper design, especially the scope of the definition of product defect.
314. See Henderson & Twerski, supra note 162; Keeton, Products Liability: Observations, supra note 189, at 1330-34.
315. William L. Prosser, The Assault Upon the Citadel (Strict Liability to the Consumer), 69 YALE L.J. 1099, 1122 (1960). In advancing this argument, it is clear that Prosser is not referring to the effect of liability on product safety or on the compensation of victims.
316. Keeton, Products Liability: Nature, supra note 189, at 695.
317. James, General Products, supra note 189, at 923. Some commentators, though, are skeptical of the effect of product liability on product safety.
318. See, e.g., Prosser, supra note 191, at 1119.
319. One such reference is Henderson & Twerski, supra note 162, at 1273, observing that "products liability would reduce the consumption of relatively risky products by increasing their monetary costs to users and consumers."
320. James, General Products, supra note 189, at 924.
321. see also Priest, supra note 161, at 470 ("James promoted one principle - risk distribution - above all others."). James, like Justice Traynor in Escola v. Coca Cola Bottling Co., 150 P.2d 436 (Cal. 1944), overlooked the point that when risk distribution is accomplished through product liability, resulting in higher product prices, individuals pay effective premiums substantially greater than their expected benefits. This mistake is generally made by traditional academic writers who justify product liability on the ground that it spreads risk through higher product prices.
322. W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS 693 (5th ed. 1984).
323. The only exception of which we are aware is Keeton, Products Liability: Observations, supra note 189, at 1333-34, who comments that the existence of private insurance reduces the need for product liability to accomplish risk spreading.
324. See, e.g., Keeton, Products Liability: Nature, supra note 189, at 693 (noting that a potential problem with product liability is the "economic and sociological costs of adjudications").
325. This literature is discussed in DEWEES, DUFF & TREBILCOCK, supra note 66, at 188-264.
326. Geistfeld, supra note 89, at 287.
327. Kessler & Rubinfeld, supra note 89, at 361-63.
328. W. Kip Viscusi, Products Liability, in 3 THE NEW PALGRAVE DICTIONARY OF ECONOMICS AND THE LAW 131 (Peter Newman ed., 1998).
329. See sources cited supra note 92
330. see also Andrew F. Daughety & Jennifer F. Reinganum, Product Safety: Liability, R&D, and Signaling, 85 AM. ECON. REV. 1187 (1995).
331. Dennis Epple & Artur Raviv, Product Safety: Liability Rules, Market Structure, and Imperfect Information, 68 AM. ECON. REV. 80 (1978).
332. Victor P. Goldberg, The Economics of Product Safety and Imperfect Information, 5 BELL J. ECON. & MGMT. SCI. 683 (1974).
333. Roland N. McKean, Products Liability: Implications of Some Changing Property Rights, 84 Q.J. ECON. 611 (1970).
334. A. Mitchell Polinsky & William P. Rogerson, Products Liability, Consumer Misperceptions, and Market Power, 14 BELL J. ECON. 581 (1983).
335. See RICHARD A. EPSTEIN, MODERN PRODUCTS LIABILITY LAW (1980)
336. PAUL H. RUBIN, TORT REFORM BY CONTRACT (1993).
337. George L. Priest, A Theory of the Consumer Product. Warranty, 90 YALE L.J. 1297 (1981).
338. Alan Schwartz, Proposals for Products Liability Reform: A Theoretical Synthesis, 97 YALE L.J. 353 (1988).
339. But see Abraham L. Wickelgren, The Inefficiency of Contractually-Based Liability with Rational Consumers, 22 J.L. ECON. & ORG. 168, 168-69 (2006) (arguing that court-imposed liability is needed even when consumers correctly judge a product's risk).
340. See W. KIP VISCUSI, REFORMING PRODUCTS LIABILITY (1991).
341. Croley & Hanson, supra note 161.
342. William M. Landes & Richard A. Posner, A Positive Economic Analysis of Products Liability, 14 J. LEGAL STUD. 535 (1985).
343. See generally CALABRESI, supra note 7.
344. Guido Calabresi & Jon T. Hirschoff, Toward a Test for Strict Liability in Torts, 81 YALE L.J. 1055 (1972).
345. Thus, for example, a manufacturer of a motorized lawnmower should be strictly liable for accidents caused by a defective blade breaking off and striking the owner. Conversely, the owner of the lawnmower should bear her own losses if she drives it on a road and has an accident. See Calabresi & Hirschoff, supra note 203, at 1063-64.
346. He observes only that bargaining between a buyer and a seller could render liability irrelevant. See CALABRESI, supra note 7, at 162.
347. In Calabresi & Hirschoff, supra note 203, the compensatory benefits and the costs of the product liability system are not discussed. In Judge Calabresi's The Costs of Accidents, there is a qualitative discussion of the benefits and costs of the tort system in general, but not of the benefits and costs of the product liability system in particular. For his limited discussion of product liability, see CALABRESI, supra note 7, at 161-73.
348. However, some scholars employ benefit-cost analysis to study related questions. See DEWEES, DUFF & TREBILCOCK, supra note 66, at 188-214 (focusing on a comparison of strict product liability to negligence-based liability with respect to the goals of deterrence, compensation, and corrective justice).
349. See also Stephen D. Sugarman, Doing Away with Tort Law, 73 CAL. L. REV. 555, 559-603 (1985) (analyzing the limited deterrence and compensation benefits of tort law generally).
350. Although these have been the major topics addressed in the economic literature on product liability, other issues have been studied as well. See, e.g., Omri Ben-Shahar, Should Products Liability Be Based on Hindsight?, 14 J.L. ECON. & ORG. 325 (1998).
351. James Boyd & Daniel E. Ingberman, Should "Relative Safety" Be a Test of Product Liability?, 26 J. LEGAL STUD. 433 (1997).
352. Paul Burrows, Consumer Safety Under Products Liability and Duty To Disclose, 12 INT'L REV. L. & ECON. 457 (1992).
353. Bruce Hay & Kathryn E. Spier, Manufacturer Liability for Harms Caused by Consumers to Others, 95 AM. ECON. REV. 1700 (2005).
354. Janusz A. Ordover, Products Liability in Markets with Heterogeneous Consumers, 8 J. LEGAL STUD. 505 (1979).
355. Jan Schlichtmann, Op-Ed., Lawsuits: The People's Last Resort, WASH. POST, July 10, 1999, at A17.
356. Editorial, Another Damaging Damages Bill, N.Y. TIMES, July 7, 1998, at A14.
357. Joan Biskupic, Court Draws Line on State Safeguards, USA TODAY, Feb. 21, 2008, at 3A.
358. NBC Nightly News: Reactions Over Record-High Judgment Against Tobacco Companies (NBC television broadcast July 15, 2000) (quoting the jury foreman in the case).
359. see also MEGHAN MULLIGAN & EMILY GOTTLIEB, CTR. FOR JUSTICE & DEMOCRACY, LIFESAVERS: CJ&D'S GUIDE TO LAWSUITS THAT PROTECT US ALL (2001), available at http://www.centerjd.org/archives/studies/Lifesavers.pdf (arguing that lawsuits concerning dangerous products make society safer by deterring negligent behavior).
360. Dennis A. Henigan, Op-Ed., Sue The Gun Makers, WASH. POST, Oct. 29, 1999, at A31 ("The threat of product liability litigation is the only incentive gun makers have to improve the safety of their products.").
361. Bob Herbert, Op-Ed., Contract On the Consumer, N.Y. TIMES, Mar. 4, 1995, § 1, at 19 (arguing that product liability lawsuits have a "deterrent effect").
362. Robert J. Samuelson, Op-Ed., Lawyer Heaven, WASH. POST, June 22, 1994, at A21 (noting that product liability law "deters dangerous products").
363. CBS This Morning: Number of Lawsuits Based on Product Liability Law Rising (CBS television broadcast Oct. 23, 1995) (reporting the position that without the threat of large damage awards, there is no reason for companies to make their products safer or take unsafe products off the market).
364. Product Liability Reform: Hearing Before the H. Comm. on the Judiciary, 105th Cong. 122 (1997) (statement of Joan Claybrook, President of Public Citizen).
365. see also, e.g., NPR Morning Edition: Fertilizer Company Sued Following Oklahoma City Blast (NPR radio broadcast May 19, 1995) (reporting that Rich Vernit of Citizen Action argued against product liability reform because it would undermine the full compensation of victims).
366. See Opinion, Review & Outlook: Lawyers Torch the Economy, WALL ST. J., Apr. 6, 2001, at A14.
367. TED FRANK, AM. ENTER. INST. FOR PUB. POL'Y RES., ROLLOVER ECONOMICS: ARBITRARY AND CAPRICIOUS PRODUCT LIABILITY REGIMES 6 (2007), available at http://www.aei.org/docLib/20070104-LiabilityOutlookPosted-g.pdf.
368. See, e.g., MILTON R. COPULOS, THE HERITAGE FOUND., AN R FOR THE PRODUCT LIABILITY EPIDEMIC 1 (1985), available at https://www.policyarchive.org/ bitstream/handle/10207/9205/87452-1.pdf?sequence=1 (claiming that the large number of product liability cases is "threatening the very existence of some industries").
369. Editorial, Overload, WASH. POST, May 8, 1995, at A20 (arguing that reform of product liability law is needed because "the present system is so arbitrary and unfair").
370. Opinion, Review & Outlook: Litigation Liberalism, WALL ST. J., May 12, 1992, at A24 (stating that the risk of product liability lawsuits retards product innovation).
371. Samuelson, supra note 212 (noting that high liability costs are one reason that light aircraft production has declined from 13,000 to less than 1000 units annually).
372. The Saturday Early Show: Warning Labels Placed on Products (CBS television broadcast Jan. 29, 2000) (observing that when companies lose product liability lawsuits, "the cost is mostly passed on to consumers ⋯ to the tune of more than $152 billion in ⋯ higher prices").
373. See also Scott Gottlieb, Articles & Commentary: More Drugs Will Mean More Lawsuits, AM. ENTER. INST. FOR PUB. POL'Y RES., Feb. 26, 2003, http://www.aei.org/article/16108 (arguing that product liability in the pharmaceutical industry raises prices and limits innovation).
374. Stephen B. Presser, How Should the Law of Products Liability Be Harmonized?: What Americans Can Learn from Europeans, GLOBAL LIABILITY ISSUES, Feb. 2002, at 3, http://www.manhattan-institute.org/pdf/gli-2.pdf (observing that product liability is random in its application and raises product prices).
375. See, e.g., COPULOS, supra note 216 (proposing a list of reforms, including a statute of repose, a limitation on contingent fees, and restrictions on awards for noneconomic losses).
376. FRANK, supra note 215 (advocating a cap on noneconomic damages and more objective safety standards).
377. Opinion, Review & Outlook: Guns and Poses, WALL ST. J., Apr. 17, 2003, at A12 (arguing that Congress should pass legislation that would limit lawsuits against the firearms industry).
378. Editorial, Review & Outlook: The Trials of Merck, WALL ST. J., Nov. 18, 2004, at A18 (arguing that FDA approval of a drug should insulate its manufacturer from product liability).
379. Samuelson, supra note 212 (suggesting that making the losing side pay legal fees would be a "genuine remedy" for many of the problems associated with product liability litigation).
380. Editorial, Trial Lawyers' Triumph, WASH. POST, Mar. 19, 1996, at A16 (endorsing legislation that would impose caps on punitive damages in product liability lawsuits).
381. Presser, supra note 216 (recommending such changes as the abolition of contingent fees and punitive damages, and the adoption of the loser-pays rule regarding legal fees).
382. The articles and broadcasts cited supra notes 209-13 either fail to provide justification or give only superficial justification. For example, Samuelson asserts that product liability will improve safety, but the effects of market forces and regulation on product safety are ignored. See Samuelson, supra note 212. Similarly, Herbert claims that product liability will lead to desirable compensation, but the fact that insurance already provides significant compensation to accident victims is overlooked. See Herbert, supra note 212.
383. This is true of most of the sources cited supra notes 209-13.
384. None of the sources cited supra notes 214-17 provides evidence to support the claim that the deterrent effect of product liability is small. However, one does take into account the significance of insurance as a source of compensation, see Presser, supra note 216, and some observe that litigation costs reduce the amount of money that victims obtain.
385. See, e.g., Review & Outlook: Litigation Liberalism, supra note 216.
386. None of the sources cited supra notes 214-17 discusses the litigation cost-related price distortion.
387. See, e.g., RESTATEMENT (THIRD) OF TORTS: LIABILITY FOR PHYSICAL HARM § 3 cmt. f, illus. 1 (Proposed Final Draft No. 1, 2005) (discussing an example in which a power company is made liable to a stranger - the company strung a power line across a river that came into contact with the mast of the plaintiff's sailboat and caused severe electrical burns).
388. See also DOBBS, supra note 1, § 227, at 578 ("Among strangers - those who are in no special relationship that may affect duties owed - the default rule is that everyone owes a duty of reasonable care to others to avoid physical harms.").
389. The discussion in this Part is based on ideas developed in Shavell, supra note 92.
390. Similarly, an oil company probably would not lose sales if one of its tankers caused an oil spill, but it would expect to suffer a reduction in demand if its gasoline damaged automobile engines. In the case of the Exxon Valdez oil spill, the most serious environmental accident in North American history, Exxon's revenue actually rose in the quarter after the spill. Exxon reported $22.2 billion in revenue in the first quarter of 1989, the quarter during which the spill occurred, and $23.6 billion in revenue in the second quarter of 1989. Exxon Corp.: Interim Consol. Earns.: June '89, STANDARD & POOR'S DAILY NEWS, July 24, 1999, available at 1989 WLNR 267918.
391. See supra section III.A, pp. 1459-61.
392. The other components of a benefit-cost analysis of liability to strangers are essentially the same as those in our analysis of product liability. In particular, regulation tends to improve safety, the compensation rationale for liability is weak, and the costs of the liability system are high.
393. To some degree courts already take consumer knowledge into account in product liability decisions. See, e.g., RESTATEMENT (THIRD), supra note 1, § 2 cmt. d ("The fact that a danger is open and obvious is relevant to the issue of defectiveness, but does not necessarily preclude a plaintiff from establishing that a reasonable alternative design should have been adopted that would have reduced or prevented injury to the plaintiff.").
394. Courts also currently consider regulation as a factor in product liability cases. See, e.g., id. § 4(b) ("[A] product's compliance with an applicable product safety statute or administrative regulation is properly considered in determining whether the product is defective with respect to the risks sought to be reduced by the statute or regulation, but such compliance does not preclude as a matter of law a finding of product defect.").
395. We are not aware of any legal doctrine that would allow the liability of a defendant to depend on the likelihood that the plaintiff has insurance coverage.
396. In an article on which we are at work, we develop these factors and explain how they could be employed by the courts.
397. See General Aviation Revitalization Act of 1994, Pub. L. No. 103-298, 108 Stat. 1552, § 2(a) (codified at 49 U.S.C. § 40101 notes (2006)) ("[N]o civil action for damages for death or injury to persons or damage to property arising out of an accident involving a general aviation aircraft may be brought against the manufacturer of the aircraft or the manufacturer of any new component, system, subassembly, or other part of the aircraft, in its capacity as a manufacturer if the accident occurred [after an applicable limitation period of 18 years].").
398. See National Childhood Vaccine Injury Compensation Act of 1986, Pub. L. No. 99-660, 100 Stat. 3755, 3773 (codified at 42 U.S.C. § 300aa-22(b) (2006)) ("No vaccine manufacturer shall be liable in a civil action for damages arising from a vaccine-related injury or death associated with the administration of a vaccine after October 1, 1988, if the injury or death resulted from side effects that were unavoidable even though the vaccine was properly prepared and was accompanied by proper directions and warnings.").