The Trumped Up Case Against Damage Awards

The House will shortly send to the Senate the tort-reform element of Speaker Newt Gingrich's Contract With America. This is the latest effort in a long crusade based on a supposed crisis of product-liability cases and other tort claims clogging courts, reducing profit margins, increasing insurance costs, enriching lawyers, and otherwise retarding commerce.

This particular measure would have the federal government preempt state standards for tort law--a bizarre posture for a party committed to limiting the federal role and restoring states' rights. Specifically, it would overturn the "strict liability" rule that is now the standard in 46 states, making it far more difficult for injured consumers and businesses to prove negligence and collect damages.

The measure--actually three different bills--would also dilute several long-standing common-law doctrines, including the seller's duty to warn a buyer of product defects and the buyer's right to hold the seller accountable for implied warranties. It would also cap punitive damages and "noneconomic" damages at $250,000, or three times compensatory damages, whichever is larger. A "loser pays" rule would require unsuccessful litigants to pay defendants' court costs. Yet another provision would limit lawsuits in securities cases where investors had been given misleading financial information.

VOODOO STATS. If there were truly an explosion of litigation, these radical changes might be worth taking seriously. But several studies show that this claim is largely trumped up. In 1992, tort cases accounted for only 9% of the civil caseload, and product-liability cases were just 4% of tort filings. In other words, such cases made up only 0.36% of all lawsuits, according to the National Center for State Courts. Excluding asbestos, something of a onetime special case, product-liability actions in federal court have fallen 36% since 1985, Legal Times reports. What's growing are ordinary business and personal lawsuits involving disputes over contracts, patent claims, real estate, domestic relations, and so on.

The would-be reformers claim that product-liability cases cost business more than $100 billion a year. But the National Association of Insurance Commissioners puts the figure at about $4 billion, which includes all insurance premiums, legal fees, and damages collected.

The claim that runaway juries order exorbitant damages is also off the mark. Between 1965 and 1990, punitive damages were awarded in just 353 product-liability cases nationwide, of which 91 were asbestos cases. In recent years, the fraction of cases won by plaintiffs has actually been declining.

Another grossly inflated crisis is medical malpractice awards. Medical malpractice insurance amounts to less than 1% of U.S. health costs, and actual awards equal about three tenths of one percent of the nation's total health bill. The claim that doctors are forced to practice "defensive medicine" is also a canard. A study by the Office of Technology Assessment found that less than 8% of diagnostic procedures were performed even partly out of concern for malpractice liability.

OWN WORST ENEMY? One could argue, meanwhile, that regulation heads off a lot of litigation, since it keeps countless unsafe products from reaching the market. Had Exxon Corp. not opposed regulations mandating stronger hulls for its tankers, it might never have suffered the Valdez oil spill and the attendant damage award. But the same sponsors of the Contract With America who are undermining common-law remedies with one hand are bent on dismantling regulation with the other.

Although federal regulatory agencies try to keep unsafe products from the marketplace, they do not always succeed. Some of the most notorious injury cases sprang from private lawsuits, not from regulatory scrutiny. These include the exploding Pinto gas tank, the Dalkon Shield contraceptive device (which rendered some women infertile), and the high-absorbency tampons linked to toxic-shock syndrome. The proposed contract would give drug manufacturers blanket protection from litigation if their products had been approved by the Food & Drug Administration, even if the manufacturer had withheld material information to secure that approval.

In the U.S., the courts are the only system of victim compensation for product injuries. The common law complements regulatory safeguards by awarding damages and thus deterring dangerous products. Conservative legal scholars have long argued that legislated regulation was redundant and inefficient, because persons claiming injury could rely on the common law. Now, the same people want to use legislation to countermand judges and juries.

Before it's here, it's on the Bloomberg Terminal.