Product liability and game theory: One more trip to the choice-of-law well

Brigham Young University Law Review, 2002 by Kraus, Michael I

Modern scholarship defends the view that current choice-of-law trends are conducive to a balanced approach to product liability law, in which each state's substantive law is unlikely to favor plaintiffs or defendants. This article takes issue with that scholarship. Using the insights of game theory, this article explains why American product liability law under current choice-of-law constraints results in systematic and increasingly pro-plaintiff adjudication. Federalizing the substantive law is the usual remedy offered for Prisoner's Dilemma problems in the states. This article criticizes the idea of preemptive substantive federal product liability law and proposes in its stead a federal choice-of-law rule developed either legislatively or by the courts. A federal choice-of-law rule, if correctly crafted, would be both compatible with constitutional mandates and conducive to the resolution of the game theoretic problem. Several possible federal choice-of-law rules are examined, but only one, a "law of first retail sale" rule, passes the needed constitutional and game-theoretic musters. Practical and jurisprudential implications of this rule are also fleshed out in the article.

I. INTRODUCTION

Life in America is less risky, by any objective account, than it has ever been: we have proportionately fewer accidents, and live longer lives, than in the past.1 Yet the business of tort law, which forcibly reallocates certain kinds of risks, is thriving as never before. This is especially true for that subset of tort law that is product liability.2

This article contends that much of the expansion of product liability3 is quite possibly not due to increased misfeasance by defendants or to increased risk-aversion by plaintiffs. Rather, this expansion may be the product, to a significant extent, of a beggarthy-neighbor4 legal arrangement intrinsically biased in favor of certain classes of local plaintiffs suing certain classes of out-of-state defendants.5 This inequity results from the unwitting creation of what is known in game-theoretical terminology as a Prisoner's Dilemma. This Prisoner's Dilemma has arguably played out as suboptimal liability across the country.

proposal avoids many coordination and knowledge problems that otherwise might prove insoluble.

Part II of this article traces the modern upsurge in product awards and contrasts the predicament of product liability with the prevailing situation in other areas of tort law. Part II goes on to explain how this predicament is likely a manifestation of a Prisoner's Dilemma, particularly in light of the peculiar confluence of the Erie Railroad doctrine and its progeny.

Part III shows how current state-based product liability law, accompanied by the two generic choice-of-law rules currently prevailing in the states, exacerbates the dilemma instead of resolving it. As a central feature of this part of the article, Part III considers an influential theme of current legal scholarship, which holds that the dominant American choice-of-law rule is helpful in resolving the game-theoretic problem. This article squarely rebuts that thesis. As a result of this refutation, recent trends in product liability law are easier to understand and, it is contended, are finally amenable to solution.

Having established both the existence and the cause of the Prisoner's Dilemma, the article explains in Part IV why federal preemption of product liability law is not the best way to resolve it. Part IV also contests the claim that an imposed "libertarian rule" (i.e., a federal statute disallowing all "inalienable"7 state regimes, thereby in effect mandating freedom of contract in matters of product liability law), proposed by at least one law-and-economics scholar,8 would be an appropriate remedy.

But no reform is without risks. Part V goes on to explore prospective shortcomings of the "state of first retail sale" rule. The article finds none of these deficiencies to be fatal to its successful implementation, though some require some tinkering with its basic modalities. Then again, the implementation of the "first retail sale" choice-of-law rule would require adjustments to several ancillary areas of the law-federal diversity jurisdiction primary among them. These adjustments are detailed in the last section of Part V. A brief conclusion follows in Part VI.

II. STATE PRODUCT LIABILITY AND NATIONAL MARKETS: A PRISONER'S DILEMMA

The "tort crisis" has arguably affected different areas of tort law differently. In this Part, an explanation will be offered for this uneven evolution of tort law. Product liability law, unlike some other areas of tort, will be shown to suffer from a particularly acute Prisoner's Dilemma.

A. The Liability Upsurge

nonetheless been attempted. One thorough study reckoned that between 1930 and 1994 the total cost of tort liability in America grew at a pace almost four times greater than the rate of growth of the economy.11 Though it was already near crisis in the mid-1980s,12 from 1984 to 1994 alone tort liability in America increased by 125%.13 In Alabama, the average punitive damages verdict in one small rural county increased to $12.9 million from 1989 to 1996.14 Tort outlays (including the costs of litigation) now consume upwards of 2.6% of gross product, according to another report.15