Conference on Consumer Redress Mechanism
26 April 2000

"Protecting the American Consumer"
by
Mr. Owen D. Nee, Jr.
Partner,
Coudert Brothers

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        The popular view, espoused in movies like "Class Action" and television programs like "The Practice" and "LA Law", is that the American consumer is protected by a vast array of product liability laws and regulations. This legal blanket protects the unwary consumer from all forms of trickery, deceit or negligence by evil manufacturers of unfit or unsafe products. Should a manufacturer be foolish enough to produce a defective product and launch it on the seas of commerce, then a law firm of clever, dedicated, protectors of the public interest will immediately spring to the aid of the consumer.

        There is some truth in this view. The United States does have an unparalleled system of legal protections for the consumer. Unlike the situation in many countries, the American consumer is not helpless when dealing with large, well-funded corporations that own and operate manufacturing empires. Moreover, this system of consumer protection does not require a vast bureaucracy of civil servants to administer the system. But this same system is also criticized for costing society too much, making American products uncompetitive on world markets, and stifling entrepreneurial endeavors.

        In the short period that I have this afternoon, I intend to outline for you why the American system of products liability law and remedies is so effective at protecting the consumer. I also intend to raise a number of those criticisms of the system that are currently being debated in the United States under the heading of "Tort Reform Legislation."

1. American Product Liability Law

a) The Role of Judge Made Law

        It is surprising to many that the American system of products liability law is principally judge-made law and not Federal or State legislation protecting the consumer. There are less than 10 pieces of Federal legislation providing for the protection of the consuming public. [1] Similarly, few States have adopted consumer protection legislation relating to manufactured products, since to do so might create an unreasonable burden on interstate commerce or prejudice a State's own manufacturers.

        The American law of liability for products is largely judge made law: first, in the development of legal concepts whereby the manufacturer of a product could be made legally responsible to the ultimate end-user of the product. Later, American courts devised practice rules that permitted consumers to band together so that they could effectively sue as a group and obtain both compensatory and punitive damages. Finally, the contingency fee litigation system created a group of specialist litigators that do nothing but consumer protection litigation.

        The substantive law legal concepts applicable in Britain and the United States at the beginning of the Industrial Revolution were not materially different. Caveat emptor was the prevailing rule in both common law countries; privity of contract applied to all sales remedies, and a manufacturer in one State was not subject to the jurisdiction of another State unless physically present there. American courts, however, over time, adopted a more aggressive approach to the duties that a manufacturer owed to the consuming public, if the manufacturer was to benefit from operating in a national economy. [2]

b) Products Liability in American Law

        The term "products liability" is applied to the liability of a manufacturer, processor, or non-manufacturing seller for injury to the person or property of a buyer or a third party caused by a product which has been sold. Products liability was formerly dealt with under legal classifications such as "negligence", "torts" and "sales", but is now recognized as a sufficiently distinct subject to deserve its own study and treatment. Whether a case is brought under a legal theory of negligence, breach of warranty, fraud, or strict liability in tort, certain issues are present in every product liability case:

1. the product in question must be shown to have been defective or harmful in some way; that is, to have had an element capable of causing injury;
   
   
2. the defect has caused bodily injury or has caused damage to some property other than the defective product itself;
   
   
3. the defendant manufacturer's or seller's act or omission with respect to his product is shown to be causally related to the harm for which it is sought to hold him liable; and
   
   
4. the party sought to be held liable for the injury is identified with the party shown to have actually been, or to have had the status of, its manufacturer or seller.

Moreover, even if all of these issues are resolved in the plaintiff's favor, there can be no recovery in any products liability case unless it is proven that the injury complained of was proximately caused by a defect in the product. [3]  These rules are not materially different from the position at common law. [4]

c) Strict Liability in Tort

        The doctrine of strict liability in tort is the culmination of other substantive movements in the law of negligence and warranty to broaden the class of persons protected from defects in a manufacturer's products. The courts, faced with injured plaintiffs, struggled with theories to make manufacturers liable for any harm caused by their products. In the field of tort, commencing with the automobile cases of the early 20th century, cars were treated as being inherently dangerous and therefore automobile manufacturers owed a duty of care to anyone injured due to a defect in their design or manufacture. Similarly, although the United States at one time strictly enforced privity of contract rules to prevent purchasers from bringing suit against anyone other than their immediate seller, products liability cases may now be brought on the theory of implied warranty under the Uniform Commercial Code. [5]  The implied warranties of merchantability and fitness for a particular purpose that are legislatively written into all sales contracts of merchants provide buyers with substantive guarantees as to quality. These implied warranties are generally construed not to be limited by privity of contract, but to run from the manufacturer to the end-consumer. [6]

        Under the doctrine of strict product liability [7], the manufacturer of a defective product is liable to any person injured or damaged if the defect was a substantial factor in bringing about his injury or damages, provided

1. that at the time of the occurrence the product was being used (whether by the person injured or by a third person) for the purpose and in the manner normally intended;
   
   
2. that if the person injured or damaged is himself the user of the product he would not by the exercise of reasonable care have discovered the defect and perceived its danger, and
   
   
3. that by the exercise of reasonable care the person injured or damaged would not otherwise have averted his injury or damages.

The theory behind the rule imposing strict liability is that by marketing a product, manufacturers and sellers have undertaken a special responsibility to any member of the consuming public who may be injured by it. Their legal duty toward consumers stems from an awareness that in today's advanced technological society it is in the public interest that an increased responsibility be cast upon the manufacturer or seller, who stands in a superior position to recognize and cure defects, for improper conduct in placement of finished products into the channels of commerce. [8]  Moreover, it is the manufacturer who is in the best position to insure the risk of a defective product causing harm and therefore it is economically most efficient that the manufacturer be legally encouraged to do so and include the cost of the premium in his price. [9]

2. Suing on Behalf of American Consumers

a) The Contingency Fee

        The Bar Associations of all States of the United States permit attorneys to enter into fee arrangements with their clients whereby their fees are determined by the amount of compensation obtained for the plaintiff. The standard contingency fee in a personal injury case is normally not less that 33% of the final damage award or settlement. [10]  The existence of the contingency fee system substantially reduces the need for legal aid in civil cases.

        Although it is sometimes said that contingency fees promote unjustified litigation, logically this would not seem to be the case. Because the lawyer or law firm that accepts a contingency fee case is required to proceed with the case until such time as there is a final judgment or the client decides to settle, the litigator should not take on any case that is uncertain in its outcome. A more justified criticism is that law firms that engage in contingency fee work occasionally take on cases expecting a quick settlement from a corporate defendant that does not wish to be bothered with the expense of discovery and trial.

        One problem with the contingency fee system cited by its critics is that in many instances, the fee paid to the lawyer is way out of proportion to the risk and effort put in on the case. For example, in cases of clear liability, a lawyer may have to commit a minimal amount of time, since the culpability of the defendant is either easy to establish or undisputed and the damages payable are readily ascertainable. Yet the attorney will still earn the same 33 to 40% contingency fee as in a case where he had to work years to prove liability and establish damages.

b) The Jury Trial

        Product liability cases are tried before a jury in the United States. The Constitution of the United States, the Federal Rules of Civil Procedure and the respective laws of each of the States preserve the right to a jury trial in any civil case. It is fundamental in American jurisprudence that unless the parties agree to waive a jury trial, a jury must be empanelled to serve as the finder of fact.

c) Compensatory and Punitive Damages

        Plaintiffs are entitled to compensatory damages calculated to cover costs of hospitalization and extended care of the injured individual. One category of compensatory damages that is frequently the source of large jury verdicts is awards for 'pain and suffering'. Pain and suffering damages, unlike medical costs or lost future income, are difficult to predict and therefore of concern to defendants in jury trials.

        The most troubling form of damages for a manufacturer, however, are punitive damages, which may be given if the defendant has shown a reckless disregard for the duty of care imposed by the law or engaged in otherwise reprehensible conduct. Punitive damages are supposed to serve as a deterrent to negligence by manufacturers. There have been some very large punitive damage awards in product liability cases, although many of these awards have been overturned on appeal.

        It is, however, less common in product liability cases to see punitive damages than in other personal injury or business torts. In the 25 years between 1965 and 1990, there were just 355 punitive damage awards made in product liability cases in the United States. [11]  A more recent study indicates that punitive damage awards occurred in only five percent of product liability cases.[12]

        The United States Supreme Court has said that punitive damages have "run wild". [13]  And that the issue is not how many times punitive damages are awarded, but whether the award satisfies basic requirements of due process. As Justice Kennedy has observed:

        "When a punitive damages award reflects bias, passion, or prejudice on the part of the jury, rather than a rational concern for deterrence and retribution, the Constitution has been violated, no matter what the absolute or relative size of the award." [14]

        Punitive damages are asked for in almost all product liability actions. They are used as a powerful lever for large settlements. While plaintiffs' lawyers have argued punitive damages are "not a problem", defense lawyers contend that they cause unfair "Russian roulette" in obtaining higher settlements.

        The Washington Legal Foundation conducted a study of punitive damage awards against businesses affirmed on appeal for the States of California, Texas, New York, Illinois and Florida. These States contain approximately 36% of the population of the United States. The study found that in 1968-71, there were 91 such punitive damage verdicts (involving cases that were thereafter affirmed on appeal) totaling US$6,994,000. Twenty years later, in 1988-91, there were 433 punitive damages cases with verdicts totaling US$790,247,000. These figures do not include cases where a jury verdict was not appealed or where the case was settled before the appeal process was completed.[15]

d) Class Actions

        Rule 23 (a) of the Federal Rules of Civil Procedure provides:

"(a) PREREQUISITIES TO A CLASS ACTION. One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class."

        Class actions are particularly well suited for product liability cases because the class of consumers tends to be so numerous that joinder of all members is impracticable and because the presence or absence of a defect in manufacture is a common question of fact. In a class action case, a manufacturer will frequently fight the case up until the Federal District Court certifies the existence of a class, which constitutes a significant victory for the plaintiff. With the certification of the class, the defendant manufacturer is suddenly faced with the prospect of having to pay compensatory damages and possibly punitive damages to all individuals that purchased its product during that particular period of time used to define the class.

e) Parens Patriae and State Action Cases

        The recent cases brought against the cigarette industry have received worldwide attention. Private attorneys working on contingency fee arrangements brought these lawsuits. Their clients, however, were the State Attorney Generals, acting on behalf of the people of their respective States, on a theory of parens patriae. Still newer cases are being brought against the manufacturers of firearms. Such cases are a relatively new development in American tort law, but because of their success in forcing big tobacco to negotiate a settlement with the various States, it is likely that there will be more such cases.

3. Tort Reform Efforts in the United States

a) How Much Does American Product Liability Cost?

        The United States tort system is in dire need of reform, as evidenced by the growth of tort costs. According to the actuarial firm Tillinghast-Towers Perrin, tort costs in 1994 in the United States totaled US$152 billion, up 125% from the 1984 level of US$67 billion.[16]  As tort costs continue to rise, consumers and businesses bear the burden through higher prices and reduced economic production. Nevertheless, tort lawsuits related to auto accidents are easily the most common type of tort litigation brought against businesses. Close to 39% of all tort lawsuits against businesses are auto-related, significantly more than either premises liability (33%) or product liability (8%).[17]  If product liability lawsuits are only 8% of all tort cases, then the cost of the American products liability system in 1994 was only slightly over US$12 billion for a multi-trillion dollar economy.

b) Competitiveness Considerations

        While most Americans recognize that the country's product liability system has benefits and detriments, one nagging concern is whether the system causes American products to be uncompetitive. The American Bar Association quotes estimates from the Rand Institute for Civil Justice to the effect that the direct cost of product liability to American business represents less than one percent of added costs for most manufacturing firms, even in reputed "high exposure" sectors. The total liability risk-cost for American manufacturers constitutes less than one percent of sales revenue.[18]  However, while this may be true on average, the cost of certain products like ladders, football helmets, small planes are so severely impacted that it is uneconomic to produce those products in America.

        While it is true that a foreign manufacturer who sell products in the United States is subject to the same product liability laws as an American manufacturer of a similar product, there are several material differences. First, the foreign manufacturer does not sell all of its products in the American market and therefore can benefit from the lower product liability costs of its home country in order to reduce prices in the United States. Second, many foreign manufacturers are effectively judgment proof in the United States and an American court judgment is quite difficult to enforce in many foreign countries. Thus, the foreign manufacturer may simply ignore the higher costs required to meet American safety standards.

c) Attempted Reform

        In May 1996, President Clinton vetoed a product liability bill that would have capped the punitive damage awards assessed against manufacturers and prevented the commencement of some product liability lawsuits. The Product Liability Legal Reform Act would have limited the amount of punitive damages that a jury could award to the higher of either US$250,000 or twice the injured person's compensatory damages. The proposed law would have also made it impossible to bring a products liability case in regard to a defective product manufactured over 18 years before the accident. The President vetoed the bill in 1996 because he needed the financial support of the American Trial Lawyers Association, who represent the plaintiffs bar within the United States and make their living litigating such cases.

        Recently the legislation has been brought back, reduced in scope so that it only applies to small businesses. The legislation would not replace any State law, which was more severe, such as Nebraska, and Washington's which do not allow punitive damages at all in product liability cases.

        Another proposed reform of the tort system is the Moore-Gephardt proposal, which attempts to encourage early offers of settlement from defendants. If the defendant agrees to pay for all economic damages (as defined by State law) and reasonable attorneys' fees, then that defendant is liable only for economic damages, and not for non-economic claims. Plaintiffs have the right to refuse such an early offer, but if they do so, it becomes harder to prove pain and suffering or punitive damages. In one version of the proposal, the victim who rejects and offer to pay economic damages must provide clear and convincing evidence of wanton or intentional defendant misconduct in order to recover non-economic damages. One aspect of these proposals is that an early offer of settlement may well-deprive the contingency fee lawyer of his large fee in a simple case, since only "reasonable" legal fees, based on added value to the case, are to be recovered from the defendant.

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        Americans would differ, probably adamantly, on whether our system of product liability laws should be followed by other countries. There are a number of clear advantages to the law and practice of American product liability law:

• Judges invented new ways to permit injured consumers to bring cases against the manufacturers who produced defective products;
  
  
• The system is remarkably efficient in defending the interests of an plaintiff injured by a defective product, whether or not that individual is capable of bringing the case himself;
  
  
  It is well suited to large class actions where numerous individual may have been injured by a single type of faulty product;
  
  
• The jury system tends to favor the injured plaintiff; and
  
  
• Punitive damages tend to cause manufacturers to pay close attention to safety when designing and manufacturing products, rather than to sacrifice safety to a reduction in production costs.

The disadvantages of the system are that:

• Manufacturers are becoming an insurer of the products performance;
  
  
• Product liability insurance in the United States continues to rise in cost;
  
  
• The number of cases multiplies each year;
  
  
• The unpredictability of jury awards of punitive damages force manufacturers of non-defective products to settle in order to avoid Russian roulette; and
  
  
• Similarly, a certified class action case almost always leads to a settlement - too often only benefiting the lawyers - because of the danger of an unpredictably large award.