The Contract and the Consumer

In the Contract with America, all but one of the ten legislative proposals deal with traditional matters of popular interest such as taxes, social security, welfare, and crime. Then there is proposal number nine, the so-called Common Sense Legal Reforms Act, which is, among other things, purportedly designed "to create 'loser pays' laws--reasonable limits on punitive damages and reform of products liability laws to stem the endless tide of litigation."

It may seem strange to place a subject as arcane as tort reform so high on the national agenda. When Americans are asked about problems facing the nation, they cite such issues as crime, declining morals, and the deficit; they don't mention the tort system. But the Republicans are not pushing tort reform to please the public.

The tort system, and products liability in particular, is a bone stuck in the throat of big business. The tort system is one place where the average citizen can battle the powerful on nearly equal terms. The contingent fee arrangement, in which the attorney's fee comes from the recovery in the case, makes it possible for someone who has been seriously injured by an unreasonably dangerous product to retain the kind of top legal talent that most people otherwise could never afford. Moreover, in the litigation discovery process, business must allow the plaintiff's attorneys to examine its files and question its research scientists, engineers, and managers. This process often forces the darkest corporate secrets--including those previously concealed from government regulators--into the floodlight of a public courtroom.

One of the earliest and most famous products liability cases illustrates how this works. In 1969 Ford Motor Company made a deliberate decision to produce a new subcompact, the Pinto, with a gas tank that its executives knew was prone to explode in minor collisions. Lee Iacocca, then executive vice president of Ford, had decreed that the Pinto must sell for no more than $2,000 and weigh no more than 2,000 pounds; these requirements forced Ford to depart from usual engineering practices. Crash tests on prototypes revealed that when the Pinto was rear-ended at speeds as low as 21 miles per hour, the fuel tank ruptured and gasoline sometimes flooded the driver's compartment. Ford engineers proposed a variety of ways to fix the problem. However, even relatively minor and inexpensive modifications threatened Iacocca's cost and weight decree, and management vetoed them all.

The National Highway Traffic Safety Adminis tration (NHTSA) did not protect the public from the Pinto. Regulators are at the mercy of what manufacturers tell them, and Ford did not choose to share its crash-test data with the agency. Even if NHTSA had known about the special danger of the Pinto, Ford may have found a way of stopping the agency from interfering. As we know from the Watergate tapes, on April 21, 1971, Iacocca and Henry Ford II were in the Oval Office complaining about forthcoming NHTSA regulations, including enhanced bumper requirements that would have ameliorated the still-secret gas tank problem; a receptive President Nixon designated John Ehrlichman as Ford and Iacocca's "contact person" on the matter. One weakness of governmental regulation is that government agencies are susceptible to political pressure--a matter particularly relevant today when federal agencies are like turtles pulling themselves into their shells, trying to become all but invisible to business or the Republican Congress.

On this occasion, however, an unforeseen event prevented political interference. A jury in a products liability case awarded Richard Grimshaw, a 13-year-old boy who would spend 20 years undergoing surgeries and skin grafts for burns he received when his aunt's Pinto exploded, $2.5 million in compensatory damages and $125 million in punitive damages (later reduced to $3.5 million by the court). In discovery, Grimshaw's lawyers had learned about the crash tests and Ford's decision not to correct the problem. Shortly thereafter, NHTSA initiated action to compel Ford to recall the 1.5 million Pintos on the road.

The Ford Pinto is merely one of many such stories. The products liability system has repeatedly exposed grave risks to public safety and driven dangerous products from the market. Time and again, it has unearthed secret files showing that companies knew about product hazards but concealed that information from regulators and the public. This was the case with asbestos, the Dalkon Shield, and General Motors pickup trucks (a case that bears an eerie similarity to the Pinto story). George L. Priest, a conservative Yale Law School professor, remarked: "No one conscious of the dwindling budget and meager accomplishments of the Consumer Product Safety Commission can pretend that the United States makes a serious effort to regulate product quality directly. Instead, our society relies on liability actions to police the manufacturing process."

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One of the primary provisions of the Common Sense Legal Reforms Act would give the prevailing party the right to recover attorney's fees from the losing party. This would abolish the "American Rule"--which has been in effect throughout the history of American jurisprudence--under which each side generally pays its own attorneys. At first blush, it seems fair that the losing party reimburse the prevailing party, plaintiff or defendant, for the heavy costs of litigation. The practical effect, however, would be to cripple the tort system. The Grimshaw family almost certainly would not have taken on Ford if their lawyer had told them that the outcome was unpredictable and, should they lose, they would be responsible for Ford's legal expenses. Litigation is inherently uncertain; even with an excellent case, no one can be assured of winning a lawsuit, particularly at the outset when key information is still in the adversary's exclusive possession.

The Republicans have tried to make their proposal appear moderate by providing that a prevailing party cannot be awarded more in attorney's fees than he paid his own counsel or, in the case of contingent fee arrangement, that he reasonably would have paid under an hourly billing arrangement. But the key feature of the contingent fee is that it affords people the benefit of legal services they could not otherwise obtain. It can easily take hundreds of thousands of dollars' worth of attorney time to litigate a complex products liability case against a determined opponent, particularly in a ground-breaking case involving complex scientific or engineering matters. The proposed legislation also gives the court the discretion to refuse to award attorney's fees if "special circumstances" would make an award unjust, but special circumstances are by definition uncommon.

Proponents may argue that the Common Sense Legal Reforms Act affects only the federal courts and that citizens will still be able to bring contingent fee cases in the state courts--at least until the states enact parallel legislation. But when the parties are citizens of different states--which is often the situation in cases involving nationally distributed products--a defendant may elect to remove the case to federal court, and thus subject it to the loser-pays provision.

While citizens will no longer prudently be able to sue manufacturers, business will not find the loser-pays rule as great a barrier to the courthouse. A business firm is better able to absorb an attorney's fee award than an individual. Moreover, business firms are generally repeat players. They bring or defend multiple lawsuits, and since a particular company is likely to prevail in some cases and lose others, the loser-pays rule may be a wash over time. As new champions of the middle class, Republicans need to explain why the courts should be open only to the rich and powerful.




Tales of the Absurd

Republicans may not have included tort reform in the Contract out of popular demand, yet in recent years Republican politicians have succeeded in making it a reasonably popular issue. They have done so by ridiculing government, in this case by portraying the judicial system as an Alice in Wonderland world of greedy lawyers and Mad Hatter judges. In a speech on the Senate floor on July 27, 1994, for example, Senator John Danforth told a story about a case involving a 70-year- old man who lost sight in one eye. "This person filed a lawsuit, a products liability case, against the Upjohn Co., and his recovery was $127 million," Danforth told his colleagues.

This was a gross distortion. A jury had rendered a verdict of $127 million against Upjohn, but not because it deemed that to be "reasonable compensation" for the plaintiff's loss. More than $124 million of the award was punitive damages, to punish Upjohn for promoting its drug, Depo- Medrol, for use in a manner that was not approved by the Food and Drug Administration and without warning physicians about the risks. Indeed, Upjohn had so effectively marketed its drug for this unapproved purpose (injecting it near the eye) that ophthalmologists were using it this way one million times per year. As is common with jury verdicts involving large settlements, the courts reduced the award. The plaintiff's final recovery, including both compensatory and punitive damages, was about $6 million.

Dan Quayle told audiences about a psychic who won a jury award of nearly $1 million because a CAT scan allegedly robbed her of her psychic powers, but he neglected to mention that the judge dismissed the award. Ronald Reagan recounted how a cat burglar sued a homeowner for injuries incurred while falling through the homeowner's skylight. When the real case was identified, it turned out that the plaintiff was not a cat burglar at all. He was a high school student who had been sent to retrieve athletic equipment stored on the roof of the school and had fallen through a skylight that had been painted black.

We will almost certainly hear more about the recent case of the woman who won a $2.9 million jury verdict against McDonald's after burning herself with a cup of hot coffee. But don't expect to hear that McDonald's coffee is heated between 180 and 190 degrees Fahrenheit, while coffee made at home is between 130 and 140 degrees; that over the past ten years McDonald's received 700 reports of patrons burning themselves with its super-heated coffee; or that the 81-year-old plaintiff was hospitalized for eight days and underwent skin graft operations for third-degree burns. Don't expect to hear, as well, that the court reduced the $2.9 million jury verdict for punitive damages to $480,000, or that the jury found that the plaintiff was 20 percent responsible for her injuries (presumably because her injuries would have been only one-fifth as severe if the coffee had been 140 degrees) and that her compensatory award was reduced accordingly.

We shall never know if a judge would have further reduced or even reversed the plaintiff's award on appeal because McDonald's elected to settle privately with the plaintiff. We do know, however, that following the McDonald's award, Wendy's voluntarily suspended selling hot chocolate--which it sold mostly to children and heated to a scalding 180 degrees--until it could lower the temperature. Reasonable people may disagree about whether there was merit to the McDonald's coffee case, but the system seems to serve the objective of prompting suppliers to make products safer.




The Mythical Flood

Yet even if the tales are mythical, is it true nevertheless that business is being strangled by liability suits in an "endless tide of litigation," as the Contract with America claims? Hardly. Contrary to the conventional wisdom, products liability litigation is not on the rise. The products liability caseload did increase substantially in the federal courts from 1975 to 1985. But from 1985 to 1990, products liability filings declined in the federal courts, and they have not increased since. In fact, plaintiffs' success rates and awards have been declining.

Second, products liability insurance costs vary widely depending on how potentially hazardous a particular product may be, but they generally are not as heavy a burden as business lobbyists suggest. A 1991 study by the National Insurance Consumer Organization found that the cost of insuring products liability, including both insurance premiums and the costs of self-insurance, constituted only 0.21 percent of retail product sales.

In surveys, businesses often say that they have withdrawn products from the market or decided not to market new products because of products liability; yet there is little hard data supporting such claims. Some bemoan the fact that liability is making diving boards harder to find at hotels and public pools, but when one considers that 1,000 people suffer spinal cord injuries in diving accidents each year, fewer diving boards may not be such a bad thing, particularly at shallow or unsupervised pools. The industry most often cited as an undeserving victim of products liability is general aviation (small planes). Although the U.S. general aviation industry lost its once dominant position in the world market, other factors were in play and it is not clear how much products liability was to blame. If products liability were driving desirable products from the market, business should have little trouble proving its case. Yet the evidence appears no stronger today than it was 18 years ago when a federal interagency task force investigated similar claims and found that most products driven from the market were, in fact, unsafe.

Another specious argument is that the products liability system puts American firms at a competitive disadvantage in the world economy. Everyone whose products are regularly marketed in the United States is subject to United States law and legal process, and it is just as easy to bring a products liability lawsuit against Honda or Volkswagen in, say, New York as it is to sue Ford or General Motors. Everyone competing in the American marketplace plays on an even playing field.


It is ironic that Republicans have included tort reform in the Contract with America. The main theme of the Republican revolution is that government is inefficient, inordinately expensive, and intrusive. Products liability, however, is a regulatory system that is neither run by a bureaucracy nor financed with tax dollars. Private entrepreneurs--that is, trial lawyers--do most of the work; the government makes only a relatively modest contribution in the form of court time.

The products liability system, moreover, is less intrusive than agency regulation. While regulatory agencies tell manufacturers what they may or may not produce, courts do not. A manufacturer can continue to sell a product and presumably will keep on doing so as long as it expects a product to be profitable. However, when the cost of injuries drives up the price of a product to a point where consumers are no longer willing to buy it, the manufacturer is likely to withdraw it from the market. The result is exactly what society should want.

If Republicans were faithful to their ideology, they could embrace the tort system as a "free market" alternative to bureaucracy. But ideology is less important here than deference to business interests. Republicans are now engaged in an effort to constrict the power of regulatory agencies and enlarge the power of business. The battle over tort reform demonstrates that hidden behind the rhetorical veneer, the target is not merely government but any limitation of business's power vis-a- vis the consumer. Their measures are popular--as long as people do not grasp their implications. Americans want to be confident of buying wholesome food, carefully tested drugs, and safe cars--and they mistrust big business just as much as big government. They are not for shooting all the watchdogs. Should the Republicans succeed in eliminating some federal agencies, constricting others, and intimidating the rest, the products liability system will become even more critical to public health and safety.

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