The Effects of the Product Liability Revolution upon Small Businesses and Entrepreneurs
Herbig, Paul A., Golden, James E., Journal of Business and Entrepreneurship
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. For example, research expenditures by American companies working on contraceptives peaked in 1973, then plummeted 90% in the next decade. This decline is almost proportional to the increase in product liability suits brought against contraceptive manufacturers during that time.
Safety improvements did not happen as the revolution's proponents had predicted it would. The old law encouraged safety improvements but did not condemn past shortcomings. Under today's legal interpretations, some companies hesitate to introduce improved models because this might indicate that the older versions could possibly have been unsafe. Each new improvement could possibly provide a standard by which older products would be gauged. An improved technique today could well be an indictment of what you did less well yesterday. The revolution, by hindering innovation, naturally hinders safety as well: What product in use today is not many times safer than its counterpart of a decade ago?
Engineers are being forced to cope not only with the safety of the product as it was originally intended but also to become mindreaders on every possible use, misuse or abuse of the product, not just now but in ten or even fifty years from today. Tradeoffs among function, price and risk are commonplace in the design of a product, but this is irrelevant in the doctrine of strict liability and the establishment of guilt or liability. Even if the "perfect product" could be produced, could a firm afford to produce it, or customers be found who could afford it? Manufacturers, knowing that the easiest product to defend is the one that was made exactly by the book, more often than not end up improving their designs only incrementally, not by leaps and bounds but by the millimeter. Radical innovation, instead of being encouraged, tends to be discouraged.
Our current legal system, as the natural outgrowth of the doctrine of strict product liability, is well designed to reduce the risks of another Chernobyl or thalidomide disaster. The mandate of achieving zero risk is attempted. However, rational risk becomes nearly impossible. Coal kills 500 persons a year in mining accidents and many more through pollution, while nuclear energy kills practically none; yet coal power is favored over nuclear power by the environmentalists and politicians. Vaccines may save 1000 lives for every one they take, but that one death costs vaccine manufacturers enough to scare most of them out of the business. Are we to eliminate all the vaccine manufacturers in order to save the one in a hundred thousand children who react to the vaccine, but in the process affect hundreds who would have died and suffered were if not for that very same vaccine? The search for zero risk is noble but impossible. Is it even desirable from society's standpoint: Do one or two negatives outweigh thousands of positives?
The threat to the governmental bureaucracy is not to be overlooked. By going by the book and perpetuating tried and true technology, the bureaucrat does not feel at risk. This will then lead the government bureaucracy to act as an inhibitor to innovation. Administrative agencies are notoriously risk adverse and drag their feet for years on the new and unproven technologies. Agencies previously created to regulate then-new but now established, mature and settled technologies (ICC-rauroads, FCC-radio and TV) have a proven investment in the prior technologies and inertia concerning the new technologies, as can be seen in the debate concerning HDTV standards. Often, the agency's own survival is at stake: It is so heavily integrated with the established technology that the innovation threatens its very existence. Government bureaucracies are not rewarded for taking risks but for avoiding failure; hence, once again, the incentives favor the old over the new. Ignorance about risks translates into the strictest possible regulation by the agency over and against the new technology. The movement to strict liability would appear to stabilize and even accelerate this philosophy.
When liability insurance is plentiful and relatively inexpensive, companies are more willing to risk litigation and bring innovative products to the marketplace. This has been the state of affairs for most of the century until 1980. During the 80s the insurance industry has been in disarray; many insurers have withdrawn from the market or charged prohibitive premiums and deductibles. The reasons for this overall lack of adequate liability insurance coverage are several: The unavailability of coverage due to underreserved position of many insurers and the inability of many to participate as reinsurers. But it is mainly because it is difficult and sometimes nearly impossible for an insurance company to estimate its real risk in product liability coverage today; claims can arise from situations created 30 or 40 years ago, but are judged by current values. And today's products will be liable for safety for thirty or forty years hence, but their coverage is only for today. In addition, there exists grave distrust of the American tort system by the international insurance community and the reinsurers, especially Lloyds of London. This distrust is highlighted by the change from the traditional occurrencebased policy to a new claims-made policy which covers only the time for which a policy is written (Carson-Parker, 1986).
Once liability became a pivotal concern, tradeoffs najturally occurred. Consumers did not win; the legal professionals are the only winners. Modern behavior does not deter risk; it deters behavior that gets people sued, which is not the same thing. Doing nothing becomes safer legally than doing something, even if the final results may be more dangerous.
Certain older technologies have been removed from the market, not because of sound scientific evidence indicating lack of safety or effectiveness, but because product liability suits have exposed manufacturers to unacceptable financial risks. Consumers have been harmed by the withdrawal from the market of important products and thus forced into dependence on a single manufacturer for some essential products, such as some pediatric vaccines. The climate has also created strong disincentives to conduct research and development in certain high risk areas. Some U. S. companies now go abroad to sell or make their latest innovations (Huber, 1987). The concept of strict product liability creates hostility to all that is technologically unfamiliar and jeopardizes that which has not yet been totally shaken out.
In essence, the product liability explosion has severely affected current and future innovation efforts in these United States and the abilities of new ventures and entrepreneurs to provide them.
IMPLICATIONS FOR AMERICAN BUSINESSES
Skyrocketing Premiums for or Unavailable Liability Insurance
The high costs of awards are causing insurance premiums paid by manufacturers to skyrocket. In 1984, a pharmaceutical firm paid $72,000 for $100 million in coverage; in 1985, it paid $85,000 for only $18 million in coverage; in 1986, insurers were asking $1.8 million for that same amount of coverage (Abelson, 1988). Product liability premium increases of 500% within the last four years for less coverage are typical. In many industries premiums have risen ten times or more for the same coverage, and occasionally liability insurance is not available at any price.
Higher Priced or Unavailable Goods
Today, only one company in America makes vaccines due to the inherent liability awards. The number of suits filed against makers of DPT jumped almost fourfold from 1982 to 1986. As a result, a dose of the DPT vaccine costs about 12 cents to manufacture and retails at 100 times cost. Ninety-nine percent of the nearly $12 price pays for liability coverage (Greene, 1983). This one vaccine manufacturer raised the cost extremely high so as to cover the product liability costs, and so prompted shortages and expensive treatments that nearly prohibit vaccination by the poor. The same result occurred for contraceptive manufacturers. In the early seventies, 13 companies were involved in contraceptive research; however, by 1986, only one company was still active (Chemical Marketing Report, 1988). The National Association of Manufacturers estimates that nearly 20 percent of the price of an ordinary $25 stepladder represents product liability costs, either as insurance premiums or awards. So does 25% of the price of a ride on a Long Island tour bus and 33% of the price of small piston airplanes. Product liability premiums cost many large municipalities as much or more as they spend on fire or sanitation services (Huber, 1988b). Product liability led to the disappearance of American-made safety equipment for football, hockey, gymnastics, scuba, and baseball. Previously, there were 18 companies making football helmets; now there are just two (Dimond, 1987). The liability costs of football helmets are often times greater than their manufacturing cost and can amount to as high as 50% of the total cost of the helmet.
Fewer or Postponed New Product Introductions
One-third of companies surveyed by the Conference Board say that liability worries have forced them to cancel or postpone new products. Another survey said 47% of respondents have discontinued product lines as a result of product liability problems. Of the respondents, 22% decided against merger or acquisition; 22% lost market share as result of product liability risks or the resultant price increases; 25% indicated they have discontinued product research as a result of product liability; and 39% said they had decided against introducing a new product due to the increased risks of product liability. These dramatic decreases result from uncertainty, which makes rational business planning impossible. It is impossible to predict what future application of product liability laws will be to today's products; hence, a manufacturer can take no adequate or totally faultless precautions against future liability (Greene, 1983). At present, millions of dollars and enormous amounts of scientific and managerial energies that should be going into finding new cures for ailments or managing innovations to increase a company's competitiveness, are instead being wasted defending useful and properly made products (Carson-Parker, 1986).
Product liability costs have prompted some manufacturers to abandon valuable new technologies, life saving drugs, and innovative product designs. Even when a company successfully defends itself, the costs of coverage and litigation, and the fear of potentially large monetary judgments can persuade management that a product is not worth selling (Dimond, 1987). Baxter Travenol left the heart valve business largely to avoid the inevitable litigation that would certainly have resulted. Monsanto Company decided in 1987 not to market a promising new filter and insulator. The material from which it is produced is certainly safer than the asbestos it would replace in brakes and gaskets, but safer is not good enough in today's litigation climate (Greene, 1983). Some researchers are slowing efforts to test and market computers with artificial intelligence. As computers begin diagnosing patients, running factories, etc., they will be open to massive potential liabilities. Go-No-Go business decisions are beginning to be decided not on profits and costs, but on advice from lawyers on liability issues, weighing the possibility of lawsuits from a particular product. Companies are attempting to avoid problems and risks by staying out of markets with high liability records. Even when they win cases, the resulting publicity may affect market share and consumer loyalty to other products in their family line.
Union Carbide developed a suitcase sized kidney dialysis unit for home use, but sold the business to a foreign competitor after determining that the size of potential damage claims and the probable costs of their legal defense made the project uneconomical. Many modern medicines have been available to Europeans five to ten years before Americans could use them and some will probably never be available for use in the United States (Huber, 1988b).
Reduced Competitive Position in the International Marketplace
U. S. firms are now paying much more in product liability premiums than their international competitors. Dow Chemical has foreign sales of $7 billion versus domestic sales of $6 billion; yet, domestic insurance costs were $100 million versus less than $20 million for its foreign subsidiaries. In 1987, Dow was a defendant in 456 suits in the U S. versus only 4 outside the U. S. (Abelson, 1988). American firms making baseballs and other sporting goods pay liability insurance eight times that of their rivals in Japan. In an immensely competitive world, this adds about 10% to the cost of an American product and could well spell the difference between a competitive product and, perhaps, one never introduced. An estimated 15% of the cost of U. S. manufactured machine tools is now attributable to product liability costs. Some machine tool and textile machinery manufacturers must support premiums 20 to 100 times as much as their foreign competitors pay. The huge product liability costs the United States manufacturers routinely pay, such as premiums, defense costs and awards, are by and large not shared by their international competitors. In addition, foreign companies have the option of effectively limiting their total liability on their United States operations by undercapitalizing their American subsidiaries, effectively refusing to enforce judgments made against them here (Huber, 1988a). Their philosophy seems to be "Go ahead and sue me; 111 just take bankruptcy." This forebears the virtual disappearance of some U. S. made products from both the domestic and foreign market place in liability vulnerable markets (Malott, 1988). At best, the U. S. firms might compete in the export market but would not introduce the product domestically.
The tort system's effect on competitiveness is both direct and indirect. Liability insurance costs, self insurance loss, defense costs, product, directors' and officers' liability, pollution, toxic and business torts, employment law and civil rights actions are all part of the direct costs of the liability system. Defensive product practices, the inhibition of innovation, a limited product line, and barriers to new entrants into the market contribute indirectly in increased costs of American firms doing business in the U.S.; hence they become less competitive in the world markets. Since the profitability prospects are not as great in the U. S., larger overhead must be placed on exported goods. This raises their prices to a point where they may no longer be competitive.
Adverse Effects of Product Liability Upon Innovation in the United States
Merrill Dow stopped producing the only anti-nausea drug prescribed for pregnant women. Merrill had won almost all of the lawsuits brought against it but decided that the litigation costs and premiums outweighed the manufacturing benefits (Dimond, 1987). So now consumers do not have to worry about any risks from the drug since they can not get it anyway! Searle had the identical experience and same result with its IUD product. Even with FDA support and approvals, it still encountered nearly 800 lawsuits, most of which were settled with only small payments; it had been to court on only 10 lawsuits, eight of which it won. It was not the size of the settlements as much as the size of the legal expenses which caused Searle to drop the product: $1.5 million to defend just 4 cases. Insurance was also unavailable (Carson-Parker, 1986). The real possibility of losing the whole company because of a product with very small revenue potential was unjustified to Searle, as it may be to many other companies in similar situations.
U. S. companies were the world leaders during the 1950s in contraception research. Contraception research by pharmaceutical companies in America peaked in 1973 and has since plummeted 90%, with most companies now virtually ignoring that area of research. No truly new contraceptive entities have been introduced in the United States since 1968. Discovery still goes on, but introduction becomes increasingly commonplace overseas, not in the U.S. In 1986, the implanted contraceptive NORplant, invented by The New York Population Council, was on the market in 5 foreign countries but not the U.S.A. A new and effective IUD won FDA approval, but it took several years before a company dared to market it. The risk was taken by one tiny company who would sell the IUD without any liability insurance; when they were unsuccessful in defending a lawsuit, they would simply go out of business easily and quickly. Effective male contraceptives and contraceptive vaccines are advancing quickly in research laboratories here and abroad. A once-a-month pill has been developed and is now on the market in France, as is the day-after pill, but neither is being marketed in the U.S. When these and others are ready for mass marketing, it is a sure bet they will not be marketed in the U.S., and certainly not by American producers. America's edge in pharmaceuticals is gone.
Manufacturers are being held responsible for adverse effects of medicines no matter how carefully they may warn the physicians of the risks and side effects inherent in their usage. Five thousand orphan diseases exist, diseases that strike too few Americans to make marketing drugs economical. Orphan drugs (drugs for orphan diseases) exist, often, but the product liability risks have made it nearly impossible to market them. If a company were to develop an AIDS vaccine tomorrow, it would no doubt be withheld from the marketplace until new legislation was enacted that would provide sufficient protection from product liability suits for that company.
The Product Liability revolution has virtually destroyed the piston aircraft industry. Piper Aircraft estimates insurance costs add between $75,000 and $100,000 for every new plane built. From 18,000 aircraft assembled during 1978-79, less than 1,000 units were built in 1988 (Abelson, 1988). In 1988, Cessna Company stopped manufacturing single engined small piston propeller driven aircraft. Piper and Beech manufacture only one model each (Greene, 1983). Interestingly enough, although they have stopped the manufacture of planes, they still remain liable for previous production.
Innovation in aircraft design typically is derived from advances in smaller planes. Innovation has been stifled because liability litigation has virtually eliminated small engine airplane manufacturing; the biggest production costs are liability related, not product related. When small plane manufacturers found their payout of liability claims rose tenfold in less than eight years between 1977 and 1985, they curtailed or suspended production of new planes; they could no longer compete with used planes already on the market with a hefty 50 to 60 percent surcharge for liability. Yet the new models kept off the market were notably safer than the older ones people were using anyway. And the potential for aerodynamic research and innovation has come to an almost total halt (Huber, 1988b). Most if not all research being done is on governmental contracts for military needs.
One of the most unfortunate effects of liability litigation is fear, which can have a stifling effect on innovation. Manufacturers, knowing that the easiest product to defend is the one that was made exactly by the book, improve their designs only incrementally. New technologies pose new risks. New products have not been totally thoroughly time tested and failures are certain to appear in early models. Suits and liability exposure could well result in company bankruptcies, government control of the direction and speed of the technology, and sometimes even limiting future advancements in that area (Cortes-Comerer, 1988). Human nature is predisposed to accept the old and familiar risk while rejecting the novel and exotic. Consulting engineers favor older design options in their specifications, fearing that the new ones will carry greater legal, not physical risk. The system promotes the most trivial and marginal change. The bold leap forward is precisely in the riskiest area and almost always in today's climate is untried.
IMPACTS ON SMALL COMPANIES, NEW VENTURES, AND ENTREPRENEURS
The Product Liability system seems to impose heaviest burdens on small companies due to escalation in the cost of premiums and legal fees. Big companies have even greater dollar exposure, with legal fees, deep pockets, and management resources and attention being captured by legal issues (McGuire, 1988). However, the big concern can afford the premiums and accepts the risk as a cost of doing business. In contrast, the small business often does not have the resources to deal with legal or liability concerns. Many small companies go without insurance and many promising entrepreneurs fail to start new businesses because they cannot afford to risk their family assets (Malott, 1983).
Small business is the linchpin of American business competition, job creation and innovation. It has been well documented that radical innovation comes from small entities outside the mainstream of an industry. Product liability, though, seems to discriminate against the smaller, more lightly financed entrepreneur, a trend which favors survival of the mighty mature corporation at the expense of the fledgling enterprise. To survive against the legal system as well as the regulatory system requires a large stable of lobbyists and liability lawyers. Only the larger companies can afford both the personnel to fight the system and the insurance premiums necessary to survive the system. If insurance for new products or innovations can be gained, it will be almost prohibitively expensive for the new venture. The company then self insures or drops the product.
The hurdle point for acceptable return for new businesses may be escalated to such a risky point that potential financial backing and venture capital are driven away; even the entrepreneur's desire may be extinguished. In addition, small businesses and entrepreneurs often have less expertise in planning for these contingencies than do larger firms. The odds for smaller companies or entrepreneurial endeavors, already very high, will escalate until they are nearly all driven out of the innovation game. As the result of the product liability revolution, an entire generation of new companies may well be discouraged from entering the American economy (Carson-Parker, 1986).
Burt Rutan, the pioneering designer of the Voyager, the first plane to fly around the world without landing, had a cheaper way of getting his products to the marketplace: He sold construction plans for novel airplanes to do-it-yourselfers who would then build the plane in their garages. These planes, once built, had to be certified by a governmental agency before the plane could be licensed to fly. This should have lessened his liability. But in 1985, although then unnamed in any lawsuits, he was so fearful of lawsuits if a homemade plane based on his designs crashed that he stopped selling the plans (Huber, 1988a). Thus, another entrepreneur has gone, taken his chips and left the game; another potential advance in aircraft technology is penalized due to the fear and risks that exist from the product liability revolution.
If Henry Ford's Model T, Whitney's cotton gin, or the atomic bomb were beginning to be introduced into today's market, rather than in their true respective decades, courts and regulators may well have stopped all three introductions. The first automobile would have been declared too dangerous; one could break his arm cranking it, or it might scare a horse and throw a rider or cause a buggy to crash from a scared mount, or a dozen other possible injuries and accidents could easily come to mind. Horses too were dangerous, but horses were an established technology and well known and accepted. Now, not only does a firm have to worry about demand growth, consumer acceptance, and market share, it has to worry about restrictions outlawing their product or potential liability cases destroying their hypothetical profits before they can be attained. This fear will primarily affect new technologies because of the uncertainties inherent in any new technology. The element of risk is imposing a high degree of conservatism to many companies, thus endangering the spirit of risk-taking that made America great.
The Product Liability Revolution was designed to spur on safer products and to provide recourse for users of unsafe products. But the severe adverse effects of this Revolution are just now becoming obvious: Less innovation, less internationally competitive products and companies, and a heavy strain on America's economy. Even when innovation occurs, the American public may be last to have the opportunity to use the product; it may be marketed abroad for years, perhaps even decades, or it may never come to these shores. In some cases, innovative efforts in entire industries have nearly ceased; pharmaceuticals and small aircraft are just two examples. Once leadership is lost, minimal chance exists of ever regaining it.
The effect upon small ventures and entrepreneurs is equally quite chilling. Many enterprises fail to get off the ground because of unaffordable insurance or inaccessible capital backers who see nothing wrong with the business plan, the idea or the potential; however, they envision potential litigation and shy away from it. In this age of Strict Product Liability, only the biggest concerns can afford the legal protection, the lobbyists to Washington and 50 state capitals, or the last resort of self-insurance. Small ventures can not afford these defensive measures and many are either not being formed, being liquidated, or stagnating. The implications for innovation in the United States are depressing since most radical innovations spring from these small ventures.
For the small business owner, there is another very real and very frightening specter: Ignorance of the strict liability code. Ignorance of the fact he can become coliable with a producer on products judged to be unsound or unsafe is possible. Ignorance that a product or service that he provides can bring not just immediate reprisals but also long term risk to his business and assets is very real. This businessman might not be able to afford insurance but even worse may not be aware of the essential need for it. Ignorance is no excuse under the law, but bankruptcy is just as real regardless of how it happens.
The intent must be to create a truly level playing field, fair for both consumers and manufacturers, yet one that eliminates the negative effects that have been induced by the current Product Liability Revolution. The Doctrine of Negligence was never and should never be in doubt. The right to sue and seek recourse due to manufacturer defect along with the high degree of international competition that exists currently in the marketplace should be sufficient to guarantee high quality products. Safer products come from constant improvement and innovation. Even God can not make anything idiotproof. Man must learn to take some responsibility for his actions, his abuse or misuse of products. Engineers can not be expected to be visionaries of fifty years in the future when politicians can't see beyond the next election. Professional endeavors to design and provide the safest products with today's technology should suffice.
Therefore, the following recommendations towards leveling the liability playing field and correcting the excesses of the revolution seem reasonable:
1. State-of-the art defense: A company could claim it could not warn of the future danger of a product, since at the time the product was marketed the scientific knowledge and technology necessary to assess the danger did not yet exist; as such the company did not know there was a danger. (A similar law was passed by Great Britain precisely because the government did not want to impede innovations).
2. Approval by Federal regulators as an acceptable defense: Strict adherence to regulatory standards would provide protection for manufacturers from most liability claims, and from all punitive damages. New Jersey recently passed a bill that establishes compliance with government regulation as a statutory defense. The statute also establishes an absolute defense against punitive damages and creates a presumption that a product is not defective.
3. Federal standards on product liability: These standards need be issued to provide for a national set of standards manufacturers and insurers can work from, resulting in one well defined federal standard of defectiveness instead of 50 conflicting standards.
4. State of Repose: A period of time after which a manufacturer can not be sued; 10 to 15 years would be reasonable. An EEC directive imposes a time limit of 10 years, with an extenion of 3 years for the claimant to become aware of the injury, defect, and identity of the producer.
5. Insurance incentives: Incentives for more insurers and reinsurers to cover liability of new products. This incentive could be financial or in the form of a more favorable political atmosphere.
6. Negligence-only liability: Assessment of liability only for negligence along with an "educational" program to inform all segments of the economy of the interpretation of negligence.
7. Abolishment of joint liability, market share liability, and deep pockets mentality: Fair application of the doctrine which assigns damages based on the defendant's determined share of negligence rather than on ability to pay. If manufacturers were liable only for that portion of damage for which they were responsible, the system would encourage safety improvement without deterring innovation. This would also place small business in a less precarious position.
8. Caps on punitive damages, on non-economic damages, and contingency fees system; caps on damages for pain and suffering; caps on lawyers' fees and hourly wage scales: perhaps these should even be caps based upon a business' ability to pay without facing liquidation of the business.
9. Greater establishment of no-fault compensation systems by government on emergency necessary items: For example, swine flu, childhood vaccines and nuclear power industry liability, among others. In order to keep special interest groups and large businesses from determining the necessary items, representatives from different parts of the economy, including small businesses, should be included.
10. Adoption of the British practice on costs: In Britain, the party that loses a case normally pays not only its own costs but that of its opponents as well. This crimps the filing of frivolous suits. This could also act as stimulus for small business to stand and fight rather than closing their doors.
11. Prior Contract: For occurrences like air crashes, which are rare but inevitable, have a set amount to be given to victims and their families and eliminate tort problems. Limit the "distributors" liability only to misrepresentation, fraud, or lack of education of the users of the product.
12. Inclusion of Collateral Source Payments: Where a defendant has first party health, disability, or worker's compensation insurance to draw upon, these sources are taken into account and any awards granted include these factors. Since even small businesses usually have some or all of the above, the overall trauma of a lost case could be reduced significantly.
13. Collateral Estoppel: When one lawsuit is successful against a manufacturer, that provides the basis for other claims, by other plaintiffs. Defendants ought to be able to use the concept as well, to report the finding and proof of safety among his products in other lawsuits to current ones outstanding. This would reduce the cost to small business of constantly having to rediscover the legal "wheel."
14. Expert warnings: Warnings must be given only to experts, not to the public at large, if the product is one that may be used legally only by or under the supervision of experts. In the case of prescription drugs, these experts are the physicians or dentists. This could limit responsibility of the distributors and also reduce the number of suits brought forward. It also places the responsibility for permitting and educating consumers about proper usage in the hands of professionals.
In return, manufacturers must accept responsibility to recall and retrofit older models when newer safety features become available; this should be done for the customer either at manufacturer's cost or for no additional fees. Companies must also pledge to make every effort to design and manufacture safe products at current state-of-the-art technologies.
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Paul A. Herbig
James E. Golden
Jacksonville State University
Paul Herbig is Professor, Marketing Department at the College of Commerce and Business Administration for Jacksonville State University, Jacksonville, Alabama. He has received degrees from Rose Hulman Institute of Technology, University of Notre Dame, and Indiana University. His research interests include reputation and market signaling, futuristics, cross-cultural influences on innovation, and Japanese marketing practices.
Jim Golden is Associate Professor of Marketing, Marketing Department at the College of Commerce and Business Administration for Jacksonville State University, Jacksonville, Alabama. He received his DBA degree from Mississippi State University and his MBA and BBA degrees from Memphis State University. His research interests include Marketing to the Mature Consumer, Sales and Forecasting, and International Marketing Strategy.…
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Publication information: Article title: The Effects of the Product Liability Revolution upon Small Businesses and Entrepreneurs. Contributors: Herbig, Paul A. - Author, Golden, James E. - Author. Journal title: Journal of Business and Entrepreneurship. Volume: 4. Issue: 2 Publication date: July 1992. Page number: 43+. © Association for Small Business and Entrepreneurship Oct 2008. Provided by ProQuest LLC. All Rights Reserved.
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