Legal Process

26 October

• Send 2-3 questions from review by Monday
• When we're making our liability decision (B < P * L ; it's not reasonable to avoid a safety measures whose cost is less than the benefits it conveys), we need to decide who makes that decision:
  • Negligence: jury or jury substitute is the decision-maker
    • Juries vs. Judges (directed verdicts, appeals)
    • Juries vs. Legislatures (use of penal statutes); the legislature has expertise and some accountability, but the jury is a case-by-case decision-maker
    • Jury vs. Market (custom); looking at the pattern of what other potential injurers do... this only works if they have an incentive to take some safety steps, and where there's some prior (market) relationship between injurer and injured.
  • Absolute liability: the potential injurer (manufacturer) is simply liable
    • Creates an incentive for R&D to discover new safety steps
    • Also creates some consumer risk avoidance incentive, because prices reflect the unavoidable risk
    • Also creates de facto "insurance" for consumers because even though they don't know enough to evaluate the risk and insure wisely, the price of the insurance is built into the product.
• Safety is usually reducing the probability of losses, but sometimes also reducing the degree of losses. Insurance is simply the spreading around of loss; risk-aversity is basically the perception that guaranteed manageable losses are more attractive than possible catastrophic losses.
• The pseudo-insurance that derives from absolute liability may not be the kind of insurance that consumers would want (i.e., what they would have gotten for themselves had they the information needed to make a well-informed decision).
• The boxes of liability. We look at per-capita potential and actual costs.

  	Ex Ante (potential)	Ex Post (actual)
  Victims
  Injurers

• Distribution 2: The Boomer Hudson River Valley pollution plaintiffs

  	Ex Ante	Ex Post
  Victims	Low	Low
  Injurers	High	High

  If the tort system is going to send a message, it can only do so if a case is brought. Also, note that signals (i.e., to avoid mishaps) can only be sent to potential injurers. So it's unlikely here that any signal will be sent, because it's not worth litigating.

• Distribution 1: automobile accidents

  	Ex Ante	Ex Post
  Victims	Low	High
  Injurers	Low	High

  Here we'll get litigation, but the signal sent won't be received because nobody has an incentive to listen.

• Distribution 3: products liability

  	Ex Ante	Ex Post
  Victims	Low	High
  Injurers	High	High

  Small probability, but high loss. This is where the dynamics of participation work in favor of deterrence/prevention.

• The tort system doesn't deliver insurance-- it delivers compensation. The question is what function compensation plays: after the fact, it plays the role of insurance, and it also puts potentially liable people on notice of the gravity of the problem.
• Potential injurers can purchase liability insurace. Liability insurance deflects the signals sent by the tort system. This is moral hazard: if you think somebody else is going to pick up the bill, it may change your behavior. If liability insurance is priced to reflect what you do (i.e., experience rating), it will minimize moral hazard. So we come to a new question: does the insurance company have an incentive to differentiate between its customers. And the result depends on the same factors: probability of harm and extent of harm. Potential injurers generally like experience rating, because it gives them the ability to control part of what they pay.
• Consider health insurance. It creates a situation in which individuals don't have an incentive to police the services they receive: there is no penalty for overservice, so rates always go up.
• Self-insurance is attractive when experience rating doesn't work in your favor, or you're dealing with large numbers (so that you have relatively steady streams of mishaps, and can deal with averages of what goes on; for large-scale manufacturers, by nature, get predictable patterns).
• Note that insurance companies are themselves performing a form of self-insurance when they select diverse customers (i.e., a single company isn't going to insure every single homeowner along the San Andreas fault: they'll balance their risk portfolio so that when any given region has a mishap, the costs are covered by the others).
• Consumers see only the price; manufacturers see the cost of production plus the cost of risk. Nevertheless, there's still an incentive to optimize the combination of the two (i.e., production + risk), because that's the price point that will balance minimizing liability with maximizing consumption. Since higher prices will reduce consumption. That's why, in the pop bottle example, we don't see manufacturers selecting the super-thick bottles.
• The secret of the course: who are the relevant actors, who is participating (who is active, who is passive)? And with respect to courts: scale and competence.
• In the torts process, the actors are actual injured people, who bring action against actual injurers. They don't think about the potential injurers or victims. Still, the accumulation of activity on the ex post side influences actions on the ex ante side. The "signal," such as it is, isn't sent because plaintiffs care to communicate with additional potential injurers. Potential injurers will either be active or passive observers of what is going on in tort suits, depending on the degree to which minimizing tort losses is attractive, and will take safety steps or insure.
• Now let's look at distribution 3 and think not just about tort liability, but about which system is best at delivering safety:
  1. Tort liability.
  2. Market. (i.e., we don't buy unsafe products, and we're willing to pay more for safer ones)
  3. Political process. (regulation, damage caps, etc.)
• Judges are constantly in the business of expanding and contracting tort liability, but we need to ask about the relevant merits:
  • what is the cost of getting deterrence via tort liability?
  • how effective is it at creating deterrence?
  The tort process is terribly flawed, but we need to ask whether it is still better than the alternatives.
• Looking at distribution 3 in the context of the political process, we see the seeds of minoritarian bias: a dormant majority, and a high-stakes minority. And they'll use their influence to suppress lawsuits. This is why we should be dubious of tort reform-- it always turns up where it's needed least.
• Remember that participation is a functon of the costs of participating and the benefits of participating. That controls whether signals will be sent, and whether they'll be received.
• Keep your eye not only on the nature of the change (e.g., in the cost of products), but also the cost of producing that change (in terms of litigation, etc.).
• There's a difference between safety and insurance in terms of its implications for the law, and the issue is damages.
• McDougald
  This is pretty darn much like The Verdict.

  In the US tort system, we've got pecuniary damages (medical expenses, earnings, both past and future) and non-pecuniary damages (pain and suffering, loss of enjoyment of life, punitives). These are set once and for all.

  Here, the plaintiff asks for medical expenses, but also both pain and suffering and loss of enjoyment of life. The court of appeals says no: money for loss of enjoyment of life will not help her at all. Tort damages are about compensation. The court is thinking of these damages as being like insurance (what would you pay for coverage of this loss, especially since you wouldn't be helped by that coverage).

  If you think of damages as being about safety, you're trying to influence other potential injurers before the fact. If that's your agenda, you want to send a different signal.

  Losses, for insurance purposes, are calculated after the fact. For safety purposes, you focus on before the fact.

  The insurance perspective is lower cost (because actual losses are easier to calculate). But if safety is important, this case is a wrong decision. For us, we want to focus on our objective when we're deciding what to argue to a judge.

• If a signal is important, we should focus on its components: damages and the chances they'll be found liable. Damages can be different from losses (either higher or lower), and the chances of being found liable can be different than the probability of harm.
• Grimshaw
  Ford looked at damages and the chances of being found liable, and decided not to implement the seemingly cheap safety measures. Why? Because the most likely outcome was death, and wrongful death worth way less than a serious injury. Not only that, but death would be rapid, so pain-and-suffering would be minimized. This, again, is the insurance concept of damages.

  We don't buy life insurance to compensate for the loss of the joy of life, we buy it to take care of our survivors. That does not reflect our view of the value of our lives (i.e., safety).

  The jury sees Ford as calculating wrongly. But they are calculating accurately, given that the signal they get is composed only of a probability of being found liable and the expected damages. So they add a kicker: punitive damages.

  Even in a products liability context, with absolute liability, there's still a surprisingly low probability of being found liable: lots of times no suit is even filed.

  Punitive damages are irrational in situations where safety isn't a plausible or needed byproduct of the tort system. But when signal-sending is important, they might serve a good purpose. And we might need to argue one day that there's a constitutional problem with a damage cap. Note that a cap reduces not only the damages, but also the probability of bringing a suit, because the potential rewards are smaller.