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Why Business Loses In Court

[originally appeared in Fortune, May 23, 1988]

Evita Peron, if one believes the stories, used to carry out a rousingly popular form of case-by-case wealth redistribution. On her radio program she would field pathetic calls from destitute widows and Buenos Aires slum dwellers. Then she would call merchants more or less at random and order them to send a refrigerator or stove to the needy household. The voters loved it.

Richard Neely is in a similar line of work. He is a modern judge. "As a state court judge," he reports, "much of my time is devoted to designing elaborate new ways to make business pay for everyone else's bad luck." He is happy to sustain an award of several hundred thousand dollars against the Michelin company even though the one-car crash in question was of "unexplainable" origin. After all, "Michelin will somehow survive (and if they don't, only the French will care), but my disabled constituent won't make it the rest of her life without Michelin's money."

The unsettling thing here is that for all his willingness to plunder a possibly innocent defendant, Neely is no cardboard demagogue. Far from it: He is thoughtful and well informed, in no way hostile to business, and keenly aware that "my microproblem as a judge who wants to sleep at night has begun to create a macroproblem for the entire economy." He explores this clash between his private incentives as a judge and society's well-being in The Product Liability Mess: How Business Can Be Rescued From the Politics of State Courts (Free Press, $24.95). The prolific judge (author of How Courts Govern America and Judicial Jeopardy) is in his best writing form. He lays out his dilemma with clarity and wit, not to mention a candor that begins on page one and never lets up.

Lawsuits alleging injury by products, Neely explains, typically pit a hometown consumer against an out-of-state manufacturer and insurer. The one who benefits from an award is a neighbor, right there in the courtroom; the potential losers are anonymous workers, investors, and managers from all the far corners of the earth, hidden behind the insensate mask of the Michelin Man or some other corporate symbol. Neely says state judges would have trouble getting reelected or reappointed if they tried to be entirely impartial between the home team and the visitors. Instead they develop a sense that it's their duty to help out their local "constituents."

This strong incentive to bestow mammoth awards is not offset by any disincentive. Dishing out home cooking to an auto accident victim in West Virginia courts will not necessarily raise prices at Wheeling tire stores. Reason: If manufacturers charge a higher price in one state to cover that state's known propensity for lawless verdicts, middlemen will simply bring lower-priced stocks in from neighboring states. So the most pro-plaintiff states will get a free ride as big liability verdicts are in effect paid by consumers nationwide. Imagine Evita's success if she could have helped her followers in Argentina by zapping merchants in Uruguay and Brazil. Of course, other states eventually catch on and try to get ahead of the pack with their own increasingly pro-plaintiff laws and pro-plaintiff rulings -- what Neely calls "the race to the bottom."

Even if a state does adopt a self-denying rule refusing liability, its citizens can take advantage of the more generous laws in other states through so-called forum shopping. Suppose just one state -- say New Jersey -- accepts the theory that tobacco companies are liable for tobacco-caused damage to their customers' health. Then tobacco companies can expect to face suits not only from current residents of New Jersey but also from those who work there while living elsewhere, and those who used to live or work there. Add to that people in distant states who perhaps smoked cigarettes made there and many others who can claim some arguable "nexus" with the Garden State -- maybe conductors who smoked regularly on Northeast corridor trains, or Delaware radio fans who heard Winston jingles played on Jersey stations back when. Some smokers will even move into the state in order to sue. The propensity of plaintiffs to head for happier hunting grounds -- what writer Peter Huber has called the have-lawsuit, will-travel syndrome -- is another reason the most pro-plaintiff states tend to set the pace for the whole nation, while pro-defendant states can find their laws a dead letter.

BUT ISN'T TORT REFORM -- the rewriting of often old laws concerning injury and damage -- supposed to be making the law more reasonable? Maybe, but there's a small problem. The folks who get to implement tort reform are the same ones it is meant to constrain: the judges on state courts. As skilled lawyers, they know a hundred ways over, under, and around mere parchment barriers. Have lawmakers limited awards for such noneconomic harm as emotional distress? Make way for creative new claims of economic injury. Does the law exclude liability for obvious hazards? The meaning of that term is, well, less than obvious. And jurists can always throw out tort reforms as contrary to their state constitutions, a tactic by which they disposed of many of the medical malpractice reforms of the 1970s.

The only ones who can stop the race to the bottom, in Neely's view, are the federal courts, which do not answer to an electorate. He believes the federal courts should simply seize control of product liability law. This display of jurisdiction-grabbing might be as audacious as anything the states themselves have done, but Neely does not shrink from the charge of judicial activism.

WOULDN'T A FEDERAL role in tort law mean sending every barroom brawl and fender-bender to an expensive and often distant U.S. courthouse? Not to worry, Neely says. Federal judges wouldn't handle most cases themselves; they would just review what state courts have done, now and then proclaiming a broad new principle or correcting an outrage of the Pennzoil variety, much as they oversee the workings of state criminal law under the Warren Court decisions of the 1960s (an analogy in which many conservatives will not take comfort). Any number of issues could serve as entering wedges for the federal supervision Neely seeks, including a case this term in which the Supreme Court is expected to decide whether a state's punitive damage awards can ever be so outrageous as to be unconstitutional.

Although Neely eschews high theory in favor of his own brand of pragmatism, many academics share his interest in correcting the system's externalities -- the misplaced incentives that encourage states to try to live at one another's expense. But few seem prepared to go as far as he toward wholesale federalization. Some are looking for the least restrictive ways of restoring proper incentives to states. Edmund Kitch of the University of Virginia suggests a general law permitting manufacturers to opt out of notorious liability states: By stamping "not for sale or use in Texas" on their products, they could escape that state's law. Michael McConnell of the University of Chicago wants to reduce the scope of forum shopping by returning to so-called choice-of-law rules, such as "the law of the place of sale governs." They have generally been part of common law and have been worn away by court rulings.

It is worth paying attention when a leading state court jurist asserts that he and his colleagues are really not up to the task of exercising the vast redistributive powers they possess. After this stop-me-before-I-rule cry for help, not many readers will remain confident that the current system can deliver the right legal answers on product liability.

One might wish, however, that the author did not share quite so many of the assumptions of the system whose workings he explains. For all that he (like most people) is troubled by the obvious excesses of the liability revolution, his critique is narrow: Just call off the states' race to the bottom, and the runners will take care of themselves. Sharing as he does the widespread view that judges are no more than politicians in robes, he merely wishes to widen, from the state to the nation, the circle of constituents whose interests they consult in making decisions. That is not really the same thing as doing impartial justice.