Reforming Tort Reform

I have had a couple conversations over the past few days with individuals regarding tort reform. One of the individuals was in favor of capping liability. Another was opposed to capping liability. The general idea behind Tort Reform is that frivolous lawsuits and a litigation-happy nation drain businesses of their funds, driving people out of work and driving up the costs of products. This also, the hypothesis goes, results in mom and pop corporations being forced to close because they cannot afford the liability for the harms that they have caused.

More often, though, the companies involved are not mom and pop corps, rather, they are multinationals who can well afford the cost of litigation and even factor that in to their business plan. For example, let's say there's a pharmaceutical company designing a new drug to treat some ailment. Research and Development of a drug can cost tens to hundreds of millions of dollars before the FDA approval is granted. The company, of course, cannot sell the drug until the approval is given, so the impetus is on getting FDA approval as quickly as possible to recoup that expenditure as rapidly as possible. The best way to do this is to cut corners. This can come in many different forms. The most obvious is to not do complete research on side effects. Another method of cutting corners is under-reporting findings, burying a 2 paragraph blurb about a serious side effect 800 pages into a 1000 page document. A third avenue of cutting corners is to under-represent or misrepresent your findings. A good example of this would be the Ford Pinto case, where the company knew of the risk of death from rear-end collisions, calculated the cost for paying out the wrongful death cases, compared that to the cost of recalling and repairing the defect, and opted to continue to sell a product they knew could (and would) kill people in a cost-saving maneuver. The problem with these methods is, eventually, the truth will come out. It's a calculated risk, though. The side effects might not manifest themselves for (say) 10 years after the product entered the stream of commerce. By then, though, the company has made millions, or even billions selling the product, not only recouping the original investment, but allowing the company to reserve hundreds of millions of dollars for the inevitable litigation that they know is coming (and since they prepare for what they know is coming, the argument that plaintiff's firms drive up the cost of medication is virtually nil).

Of course, these companies are for-profit companies, which means they owe a fiduciary responsibility to increase shareholder value. One way to do this is to expand the sales of their medication. How does one do that? They market the product for purposes it was not originally approved for. In the pharmaceutical realm, this would mean off-label marketing, or marketing for purposes other than what the FDA approved the product for. The companies will hire other companies to write off-market friendly literature which they can then distribute (think of the tobacco companies with their doctors who could show no definitive link between smoking and lung cancer), knowing that people will trust the literature and expand the use of said product.

The problem with capping liability, besides the fact that it would free up more profit for the company, is that often times those injuries caused by the knowing misrepresentation or under-representation of the company will cost more than what the liability cap might allow. If I take a drug and develop lymphoma as a result, the treatment for that, and the cost of medications will continue indefinitely. Capping liability per plaintiff would essentially punish them for relying on the misrepresentations of the company as to the safety of their product.

There's more to tort reform than this, such as the trend towards arbitration vice litigation with a minimum injury requirement before one can even make a claim for recovery, but this post has gone on long enough.