The Effects of the Product Liability Revolution upon Small Businesses and Entrepreneurs

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ABSTRACT

Over the last thirty years the core of liability law has traversed from simple negligence to the far more complex and general concept of strict product liability. This change has been heralded by many as a victory for consumers and for safer products. In theory, enhanced quality, safety, and innovation should have resulted from this liability revolution. In actuality, the reverse occurred. In this paper we examine the product liability revolution and its implications for innovations for small businesses and entrepreneurs; we also provide recommendations for a more just, but still effective, liability code.

THE PRODUCT LIABILITY REVOLUTION

Over the past three decades, the United States has changed its guiding principles on liability law from the concept of negligence to the more general concept of strict liability. Negligence is failure to use reasonable care in the design and manufacture of a product. Within the doctrine of negligence, the manufacturers could not be sued if a consumer misused or abused the product and caused injury to himself, as long as the product performed as intended. During the sixties and seventies consumer advocates cried that the consumer was being unfairly treated and was not protected from manufacturers' carelessness or product deficiencies. The result was the creation of the doctrine of strict liability, which switched the focus of liability law from the manufacturer to the product. If a defect is found, liability can be incurred, regardless of when the product was manufactured or whether the manufacturer used the state-of-the-art technology.

The concept of strict liability means the product can be designed and built according to specifications with no manufacturing product defect, but, if it causes an injury, the compnay can still be held responsible. Thus, even without negligence, a manufacturer can be held liable for selling a product that causes an injury, whether that product was or was not defective. A manufacturer can be held responsible even if the product is misused or abused. This is true if the product was misrepresented either in advertising or in warranty; if the manufacturer issued insufficient instructions about how to use the product; if a channel member gave false, misleading or inadequate information about a product; or if the manufacturer issued inadequate warnings about its possible risks. In strict liability, if the product was determined to be in a defective condition or unreasonably dangerous to the user when it was sold, the manufacturer is liable. Additionally, the manufacturer is potentially subject not to a single code but to 50 different standards of liability, one for each of the fifty states (McGuire, 1988). This change in the concept of strict liability began what has been called the Product Liability Revolution.

Proponents of strict product liability indicated that the enactment of these laws would result in spurring innovation as a means of increasing safety and minimizing lawsuits. The assumptions were that safety and innovation would flourish under these new product liability laws and that manufacturers would seek out the best and newest techniques and materials to avoid the liability problems. This has not happened; on the contrary, innovation has often been suppressed and in many respects Americans are worse off than before the beginning of this revolution.

Companies that produce products designed to improve health or enhance safety are among those most likely to be sued. They are most likely to remove their products from the markets and they are also most reluctant to introduce new ones. This undermines one of the stated purposes of product liability laws: to enhance the health and safety of American consumers (Malott, 1988). Bad products have been taken off the market, and no doubt good ones too; but the numbers of good innovations withheld far outweigh the positives of the movement. Where the liability problems have been most intense, manufacturers responded to the liability threat by not pursuing innovation. …