July 14, 1998
WHY THE PRODUCT LIABILITY BILL WAS DEFECTIVE
COMMENTARY by Dennis Berman
Small business advocates on Capitol Hill came tantalizingly close last week to achieving a goal business has sought for decades. Business leaders have complained unceasingly about the laws that let individuals sue corporations for huge amounts in product-liability cases. The legislative effort to cap a company's exposure gained momentum in the form of a bill that picked up bipartisan Senate support and the nod of President Clinton, who vetoed similar legislation in 1996. Under the measure, the punitive damages that could be levied on companies with fewer than 25 full-time employees or less than $5 million in revenue would have been capped at $250,000.
The hopes of small business were extinguished when Senate Majority Leader Trent Lott (R-Miss.) inserted a handwritten amendment into the proposal, while simultaneously limiting new amendments from Democrats. Offended, the Democrats quickly killed the bill, with co-sponsor John D. Rockefeller 4th (D-West Va.) even voting "nay." Small-business lobbyists are now in a huff, contending that the Senate never debated the bill's merits. "We haven't had our day yet," says Mary Beth Reilly, lobbyist for the small-biz group National Federation of Independent Business.
If Lott's intent was to bump off the legislation, it was far from artful politics. But a close look at the proposal shows that he may have done the right thing. For if the Senate had voted yea, it would have approved legislation with major weaknesses. The measure would have responded to a "crisis" that hasn't been fully documented -- and that nonetheless is already addressed by numerous state statutes. The Senate also would have approved a measure that discriminated against the rights of those unlucky enough to be hurt by the carelessness of a small company, while those who suffer the same injury from the mistakes of large companies would have been left to recover much more.
First, let's understand punitive damages. They are not part of compensatory damages, which juries award to product-liability victims for lost wages, medical bills, and pain and suffering. Rather, they are a tool for courts and juries to punish companies or individuals who act with gross negligence or malice. Punitive penalties are meant to hurt: Many states, including California, prohibit companies from insuring against punitive claims, thus making a company vulnerable where it matters most -- the bottom line.
Many of the nation's most highly publicized jury awards include punitive damages. During the week of July 6 alone, for instance, Francis Ford Coppola won a $60 million punitive award against Warner Bros. for blocking him from making a Pinocchio movie for another studio. A former employee of trucker Roadway Express who was fired after complaining of on-the-job racial discrimination was awarded a $100,000 punitive award. And seven insurance-company managers who claimed to have suffered age discrimination at Liberty National Life Insurance Co. took home $5 million in punitive damages.
Not one of these examples involves a defective product, and that's no coincidence. Less than 5% of all punitive damages are awarded in cases involving defective products, according to a study by the Rand Corp.'s Institute for Civil Justice. Indeed, though the small-business lobby suggests that such suits are a widespread problem, there are few examples of small companies paying large punitive awards. "We've been asked this question a lot," says the NFIB's Reilly. "But these things aren't recorded."
Joan Mulher, lobbyist for the consumer-protection group Public Citizen agrees that "it is hard to get a statistic on this...." She argues that "the burden of proof that there is a problem here is on those supporting the legislation."
Big damages or not, a problem exists, argue the product-liability reformers. They're talking about a so-called shadow effect that the mere possibility of punitive damages has over pretrial settlements. As advocates of caps on punitive damages see it, the threat of unpredictable, uninsurable damages forces companies to settle cases that have little or no merit. "Trial lawyers use it as a club," says Paul Huard, chief lobbyist for the National Association of Manufacturers. "Enough of them [requests for punitive damages] result in outrageous awards that people get nervous."
Lately, however, state governments have been installing their own caps on punitive damages. Some 28 states now have a patchwork of limits in place, which range from $250,000 to $500,000, depending on the size of the company. On top of these, a new federal standard would spawn a legal mess, as lawyers and judges try to wade through what fits under the new rules and what doesn't. Both groups are still picking through the legal wreckage wrought by a 1996 U.S. Supreme Court decision that toughened the standards for huge punitive awards.
"We are not prepared to draw a bright line marking the limits of constitutionally acceptable punitive-damages awards," Justice John Paul Stevens wrote at the time, in a case in which an Alabama doctor was awarded $2 million when a BMW dealer failed to tell him about a paint job covering acid rain damage to his car. But "we are fully convinced that the grossly excessive award imposed in this case transcends the constitutional limit."
None of this, of course, gets to the ethical argument against a small-business cap on punitive damages, especially given the lack of proof for an epidemic of high awards. Is the life of a person who dies because of a defective product worth less because that product was manufactured by a company of 25 employees instead of by one with 26? The question becomes even more urgent once it's clear how many companies the proposed bill would have covered. According to a Public Citizen analysis of Small Business Administration data, nearly 80% of the 327,805 manufacturing companies in the U.S. would have been classified as "small" under the new standard. There are a lot of small manufacturers in this country," says Mulher, who contends that "a lot of them make defective products."
Congress may one day find that the benefits of punitive-damage caps -- for businesses of all sizes -- outweigh the abuses inherent in numerous requests for punitive awards. But the Senate's bill came at a time when there was no clear, demonstrable crisis in product-liability litigation and when some states were already legislating caps themselves. And the "small business" classification is a standard that could limit victims' claims at random. It was legislation that deserved to die.
Dennis Berman
is a is a staff reporter at Business Week Online
