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Why is the products liability system considered imperfect? Use examples to support your answer.
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Business and Its Environment
Edition: 7th
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The products liability system has been criticized on equity, distributive, and efficiency grounds. The equity arguments often express a belief that cases should be decided on the basis of fault and negligence. In particular, firms consider it inequitable to be assessed damages when there was nothing they could have done to prevent the injury. Objections have been made to the inability to use state-of-the-art design as a defense in cases governed by strict liability. In the absence of a statute of repose for capital equipment, this means that an injured party may be able to sue successfully for an injury caused by a product manufactured many years earlier when technological capabilities were more limited.
The distributive objection is that the awards in many cases are too large and seem to provide a prize, as in a lottery, rather than providing compensation for actual losses. The deep pockets of producers are seen by some jurors as a means of helping those who were unfortunate enough to have been injured. Criticism has centered on damages awarded for pain and suffering, which some argue are often unreasonable and unguided by legal standards. Whether awards are too large is unclear, however, and limits on awards remain the subject of considerable disagreement. Most products liability cases are filed in state courts, and trial lawyers shop for the state venue most likely to favor their cases.
As the Coase theorem indicates, the distributive consequences of a legal standard can be independent of their efficiency consequences. However, liability awards can force firms into bankruptcy or dissuade them from producing certain desirable products. Because a number of pharmaceutical companies had stopped producing certain vaccines as a result of liability costs, Congress passed the Childhood Vaccine Act of 1986, which established a no-fault compensation system and capped pain and suffering awards.
In addition to concerns about the standards on which cases are decided and awards based, the liability system is costly to operate. Court costs and legal expenses for defendants are high, and under the contingent fee system, attorneys for plaintiffs typically receive one-third of any award or settlement.
Another criticism is that punitive damages awards are governed neither by statute nor clear constitutional guidelines. Instead, juries have been largely free to assess punitive damages as they see fit. The imposition of punitive damages without standards to guide their award has been a source of concern to both firms and jurists.
From the perspective of producers, damage awards are difficult to predict, complicating the estimation of the ex post consequences of their ex ante decisions. The insurance system allows firms to insure against that risk, but the insurance system itself is imperfect and costly to operate. Also, many firms are unable to purchase liability insurance.
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