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Book Review: The Liability Maze: The Impact Of Liability Law On Safety And Innovation Edited by Peter Huber and Robert Litan

Doug Bandow

The Brookings Institution, 1775 Massachusetts Avenue, NW, Washington, DC 20036-2188 • 1991 • 514 pages • $35.95 cloth, $16.95 paper

The Brookings Institution has a long liberal pedigree, but it continues to surprise. Institution scholars have criticized environmental regulations, praised airline deregulation, and promoted educational choice. Now Brookings scholar Robert Litan has joined with Peter Huber of the Manhattan Institute to edit a book that shows the high costs of litigation to the American consumer.

Others, Huber as well as Walter Olson, also from the Manhattan Institute, have documented the liability revolution that has created a kind of legal lottery, enriching and penalizing irrespective of causation and fault. The focus of The Liability Maze is more limited: the book, composed of papers from a Brookings conference, explores the impact of litigation on business innovation and safety.

The issue is as complex as it is important. Write Huber and Litan:

Expressly or by implication, most of the authors in this volume agree that the effects of the liability system, whatever they may be, depend on much more than the narrow question of whether liability is imposed, or on the still narrower question of what legal standard (like “negligence” or “strict liability”) is applied. The authors all recognize that jury trials, contingency fees, long-tail liability, the sheer size of awards, and the stigma-tizing effect of punitive damages, along with adverse publicity, market forces, and regulation are at least equally important.

Nevertheless, some general conclusions stand out. Where liability remains modest, litigation appears to have encouraged innovation—a not surprising conclusion, since a well-functioning tort system will force a firm to internalize more of its products’ costs, and thereby provide it with an incentive to take cost-effective countermeasures. However, as liability and damages expand, the impact on innovation becomes highly negative. This effect seems to be strongest on the general (lighter plane) aviation industry. Serious problems are also evident in the medical and pharmaceutical fields. The only dramatic counter-example appears to be chemical production.

The findings on the effect of liability on safety are more equivocal. For one thing, lawsuits operate in tandem with private and public regulatory systems—doctors’ professional standards of responsibility and the National Highway and Transportation Safety Administration, for instance. It appears that the conclusion of Judith Swazey of the Acadia Institute, that litigation has “had only a marginal .impact on the development of safer drugs” because it is only one of several factors involved in their production and marketing, is generally applicable. While liability has caused manufacturers to expand warnings, that step has had no obvious impact on safety.

Litigation, irrespective of the outcome, may, however, have a significant impact if it becomes the focal point for media attention. Writes Harvard’s John Graham, the “indirect effect of liability on consumer demand—operating through adverse publicity about a product’s safety and a manufacturer’s reputation—is often the most significant Contribution of liability to safety.” Although this effect is probably most evident for autos, Andrew Craig from Wichita State University found a similar impact on the sale of small aircraft.

Unfortunately, for all of the research that went into The Liability Maze, the analysts don’t really answer the most fundamental question: Is today’s litigation explosion providing us with the “right” amount of safety? Although it may seem a heretical concept, it is possible to be too safe in the sense of paying more than we want in order to avoid infinitesimal risks. For instance, Murray Mackay of the University of Birmingham estimates the cost of the average car to be several hundred dollars higher because of liability. Yet, writes Graham, safety “has historically been a minor consideration in consumer choices.”

The expansion of litigation appears to have had a far more expensive impact on the general aviation industry. The liability charge for a light plane rose to between $70,000 and $100,000, figures attorney Robert Martin, with naturally devastating consequences for this industry. “The price of new airplanes reached the point at which prospective buyers increasingly chose to purchase a used plane rather than a new one. Margins were cut, manufacturing plants were closed, engineering staffs were trimmed, and factory employees were laid off,” writes Martin. But consumers, too, lost, for the amount of safety purchased at such a high price seems to be miniscule. If people are now safer, it may be because they are not buying products and undertaking activities that they desire: indeed, several of the volume’s researchers believe that liability has “increased” safety by reducing the demand for goods and services.

Furthermore, there are at least some cases where litigation appears to have reduced safety. Some auto executives fear adopting prudent changes that might be viewed by a jury as evidence that the previous design was negligent. Moreover, the expansion of medical malpractice lawsuits has created a veritable industry devoted to “risk management” of practices with high-liability potential. In this way, writes Stanley Joel Reiser from the University of Texas, “the liability ethos diverts a significant activity, risk management, away from its proper focus on the patient’s welfare to a concern with professional and institutional liability protection.” Pervasive litigation may also hinder experimental procedures and products because of fears of liability.

What is to be done, ask Huber and Litan. One could argue, they observe, that we don’t know enough about the effect of liability on innovation and safety to formulate a policy. After all, if Swazey is correct in contending that there are “virtually no solid data” on the impact of litigation on the safety of drugs, then how can one know how to act? But, as Huber and Litan point out, “the one issue beyond dispute is that legal rules are policy, and policy will be made, in courts if not in legislatures, with or without data.”

Thus, they offer some thoughtful if modest suggestions. First, the legal system needs to do better at incorporating positive rewards for product experimentation and improvement. In particular, the liability system needs to reflect the fact that to fail to innovate may actually be riskier than not to modify a product or service. “Legal rules, jury instructions, and evidentiary standards can all be crafted to give more equal weight to these symmetric considerations,” write Huber and Litan.

Second, efforts should be made, in their view, tore-connect liability to risky behavior. One doctrine they single out is “the ability of plaintiffs to recover for product-related injuries decades after products have been on the market and previously not been held liable for injury.” Huber and Litan suggest a statute of repose to limit the period of liability and constraints on punitive damages.

Third, they propose a broad review, buttressed by systematic analysis and research, of America’s legal system combined with a willingness “to apply the same cost-benefit standards to the liability system that the liability system applies to doctors, drug companies, and the manufacturers of planes, chemicals, and cars.” Particularly important would be a thorough assessment of the impact of differences between the U.S. and foreign systems, such as America’s failure to force the loser to pay the litigation expenses of the winner, which encourages frivolous and nuisance suits.

The Liability Maze, written and edited by scholars, is a fine volume that should enhance any reader’s understanding of the so-called liability crisis. The book raises more problems than it solves, but that reflects the intricacies of the issue rather than any shortcomings on the part of its authors. []

Doug Bandow is a Senior Fellow at the Cato institute. A graduate of Stanford Law School, he is a member of the California and District of Columbia bars.

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