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February 23, 2000

Regulation Through Litigation: Assessing the Role of Bounty Hunters and Bureaucrats in the American Regulatory Regime

Panel Two: A Public Choice Comparison of Litigation and the Regulatory State

MR. C. BOYDEN GRAY: This is an impressive panel, and I imagine that what has already been said will not steal any of its thunder. I’ll save my remarks for later, except for this: if you look at litigation versus regulation as a question of public choice—who benefits the most in terms of rent seeking—litigation wins hands down. The lawyers make considerably more money out of litigation than they do out of rule making, notably here in Washington D.C. That does not mean that this is the right way to go.

PROFESSOR GEORGE PRIEST: My comments today are based on a simple question: How should those who are dedicated to limited government think about regulation through agencies versus regulation through the litigation system?

The public choice approach, which is the subject of our panel, tells us something about that subject, but there are limitations to public choice in answering the question. Public choice teaches us that all individuals will pursue their personal interests. Pursuit of self-interest will affect the outcomes of any process, whether it is agency regulation or the courts and litigation. The pursuit of interest itself, however, is affected by the normative structure of the regulatory system in which the pursuit takes place.

How might we compare the normative structure of regulation through agencies versus the courts? The normative structure of agency regulation is substantially different from the normative structure of litigation. This distinction is important when thinking about whether we better achieve limited government by regulation through agencies or litigation.

The normative structure of agency regulation is constrained, for the most part, to those areas of commercial or human activity where it is believed that the market does not work. To simplify, agency regulation is tolerated in three circumstances: where industries are characterized by natural monopoly; where substantial externality problems—such as pollution—are present; or where there is a low level of consumer understanding about the characteristics of products that they are using. There is some question about the normative construct in this last category—there are arguments as to whether the lack of consumer information in, say, the auto safety area is really a serious problem. Nevertheless, some justification of one of these types underlies all of agency regulation. As a consequence, these justifications substantially constrain the scope of agency regulation and limit the extent of government involvement in our lives.

The normative structure of litigation is different. Many years ago, litigation was subject to similar constraints, perhaps even greater constraints. People thought carefully about when litigation was appropriate and what disputes it ought to address. That is no longer true. The normative structure of our current legal system is one of cost internalization. That is, courts are willing to entertain litigation in any context where one person can claim that another person or entity has imposed costs upon it. The modern damages verdict serves to internalize these costs to the person or to the entity that is alleged to cause the harm. (I am not going to address punitive damages, but as Kip Viscusi mentioned, the normative structure of punitive damages extends even further, serving as some vague and often unpredictable form of punishment.)

There are substantial differences between the normative structure of regulation based upon market failures—or alleged market failures—and the normative structure of litigation based on internalizing costs. First, there is a vastly greater range of regulatory control that occurs in the litigation system. Litigation is not limited to clear market failures. It is not limited to natural monopoly industries. It is not limited to situations in which there are clear externalities. Certainly, it is not limited to situations where consumers lack information and thus one can convincingly argue that the market does not work. Litigation, as I mentioned, extends to all industries. Indeed, it extends to all activities. We see litigation today that we would never have seen twenty years ago, such as students bringing actions against teachers and even children bringing actions against their parents.

Second, the normative structure of litigation—internalizing costs—has no clear substantive bounds. For example, there are fundamental problems in the conception of causation in our litigation system that are exacerbated by the internalizing cost conception. There are many situations in which there is no clear definition of what is a cost to what. This topic has been written about both by Ronald Coase and Judge Calabresi and is exemplified in Coase’s query of whether the costs of trampled corn should be internalized to the rancher or the farmer. These issues need far greater explication, particularly now, because the litigation system has expanded beyond previous limits. At the moment, questions of causation that relate to internalizing costs have not been solved, and this uncertainty gives litigation a much broader range than agency litigation.

Third, the normative structure of litigation—the conception of internalizing costs—is not limited by an alternative regulatory conception of competition in the market. The fact that there is competition in an industry or the fact that the market provides an answer to a particular problem is often a decisive factor that makes agency regulation unnecessary. In contrast, the existence of competition or the market has almost no importance at all to the resolution of litigation. That is why litigation today is fundamentally at odds not only with agency regulation, but with the most basic conceptions and understanding of market processes.

Let me give you an example of litigation that illustrates this litigation/regulation distinction. Let me say, at the outset, that I have given some professional advice in this context, but my ideas precede my involvement. And, you will see, my views on this litigation are so extreme that they could not possibly be the result of some type of consulting bias.

Very recently, there have been a number of class action suits brought against the managed care industry. Dan Kessler referred to some of these already, such as suits where there has been some sort of harm—misdiagnosis, mistreatment—to one of the participants in a managed care program. The question in that sort of litigation is relatively simple: Should the suit be brought against the HMO or brought directly against the HMO’s doctors?

There is another set of lawsuits, however, that represents a much broader attack on the managed care industry. These also are class actions. The basic claim of this litigation is that the HMO’s have committed fraud on participants in managed care programs by using cost as a criteria for defining the nature of the care to be provided. Simply using cost as opposed to pure medical criteria constitutes the fraud. It is largely irrelevant, in these actions, if there is direct harm to any victim.

Under the normative structure of litigation—the conception of internalizing costs—one cannot easily dismiss this sort of claim. These participants receive care that is defined by some kind of cost, treatment that is allegedly different than the participant would receive if the plan were defined only by medical criteria. So there is, conceptually, some type of cost involved; thus, one cannot dismiss the action in an internalizing costs framework. Nevertheless, even the most simple understanding of markets will show that these cases are incoherent. They are also contradictory to our basic form of economic organization.

All care systems must consider cost to some extent. If one were to look to European social welfare systems, cost comes heavily into play. A further incoherence in these cases, of course, is that there really is no damage: these participants have paid less for medical programs that are constrained in various cost dimensions than they would have paid if there were no cost controls on the system.

There is, however, an even more fundamental problem to this sort of litigation. The internalizing cost framework for thinking about this problem is misconceived. Deciding whether something is a cost or not a cost, and whether a cost should be placed back on the HMO so that they will organize their care program in a different way, misconceives the nature of the industry because it completely ignores the effects of competition on the organization of health care. Here the difference between regulation by an agency or by litigation becomes dramatic. In the regulatory context, regulators would ascertain if the market for health care suffered some ongoing or intractable failure and would intervene only and only to the extent that they identified such a market failure. That is not the issue at all in this litigation. These suits proceed in the absence of any identifiable personal harm or any demonstrable market failure.

These cases have only recently been filed. While many non-meritorious cases are of little ultimate importance, I suspect that these cases will greatly affect our health care system. As Judge Calabresi mentioned before, firms will adjust in response to the costs of litigation, or in response to the threat of litigation, and these costs are not insubstantial. These suits may be dismissed and should be dismissed, so their effects should not be overstated. But they show starkly the different approach of regulation by agency or by litigation; one, by agency, a sensible approach to public policy in the field; the other, litigation, essentially incoherent. Let me provide a further and more concrete example of similar litigation. A few months ago, State Farm Auto Insurance Company lost an Illinois class action suit.13  The central claim was that State Farm committed fraud by using what are called “after market repair parts”—repair parts made, at low cost, by producers different than the car’s original manufacturer. The plaintiffs claimed that State Farm’s practice of using “non-original equipment manufacturer” parts in auto repairs constituted a breach of its agreements with policyholders and violated Illinois’ consumer fraud law. The jury and judge agreed. Similar suits have been filed against virtually all other auto insurers.

These lawsuits are very similar to the managed care suits I described and are similarly incoherent. First, these cases do not involve safety parts. These are only crash parts—the grill, the bumper—that affect the appearance of the car; they do not in any way affect the safety of the car’s occupants The lawsuits are incoherent from the standpoint of public policy because consumers benefit from the use of cheaper repair parts, and reap the benefits in lower insurance premiums. To give a personal example, I drive a 1987 van. The notion of having that van turned into a new automobile if I’m in a crash by the installation of originally manufactured parts is insane. It makes no sense to have a crash turn an old car into a new car. I do not want to pay an insurance premium that will guarantee me new parts after an accident. If I wanted a new car, I would pay for a new car. I should not be penalized for my preference for getting by with an old car by having a lawsuit force insurers to charge me a high premium to restore my car to new.

Like the HMO fraud cases, there is also a circularity here that comes from ignoring the operation of the market. What exactly are the damages that result to the policyholders from the use of after-market parts? The premiums are lower as a result. Policyholders benefit from those lower premiums. There is no market damage. This lawsuit gave no attention whatsoever to competition because, as I mentioned before, competition is irrelevant in the context of internalizing costs. It is irrelevant, in regulation by litigation, that State Farm and other auto insurers are subject to competition. In the context of auto insurance, it is ridiculous from the standpoint of public policy to ignore the existence of competition. More than almost any other product, auto insurance is dominated by consumer repeat purchase. State Farm asks its policyholders to renew every six months. If there were real consumer harm, customers would turn to other firms in the market. There is no evidence of them doing so in response to the use of after-market parts. This fact would be determinative in the context of agency regulation; it was irrelevant to the lawsuit.

As I mentioned, the lawsuits against the managed care industry may still be dismissed. State Farm, on the other hand, was hit with a $1.3 billion verdict for its policy of reducing insurance premiums by using after-market parts. It is impossible to look at the HMO and auto parts litigation and say that they contribute to sensible social policy. State Farm’s reaction, as would any company’s be following a $1.3 billion verdict, was to terminate the after-market repair parts policy entirely. Neither State Farm’s policy holders nor a society concerned with conserving resources benefits from this result.

Litigation of this nature resembles corruption. It is not corruption in the sense of bribes to judges or exactly in the sense of excessive benefits obtained by any untoward means. What I mean by corruption, and it is characteristic more broadly of corruption in the Third World, is that we see in this litigation the diversion of productive resources to redistributive ends. In the Third World, productive resources are diverted into the hands of government officials, imprisoning the citizens of these countries in economic impoverishment. Here, we see the diversion of productive resources into the hands of plaintiffs and the plaintiffs’ bar. The effect on the economy and the effect on the society in terms of diverting productive resources is of different magnitude, but in exactly the same direction.

To return to my original question: From the standpoint of those who believe in limited government, how do we analyze the question of regulation through agencies or regulation through litigation? We cannot simply compare the process of agency regulation to the process of litigation. It is difficult to compare the outcomes of the two processes, because we have so little information about the magnitude of the welfare effects of litigation. It is helpful, however, to compare the normative structures of these two methods of regulation. The difference between these two methods was not so strong in the 1960’s when the agency deregulation movement began. It is true today, however, that agency regulation has been constrained by clear ideas of what is and what is not in the public interest. It has been constrained by the notion that regulation should be limited to the small, and growing smaller, set of conditions in which the market will not work.

There is no reason to support greater agency regulation on these grounds. But there is a reason to support agency regulation over litigation. The problem that we see here—again from a limited government standpoint—is that the normative structure of litigation is not constrained by the same conceptions. Put differently, we have not seen a deregulation movement in our civil justice system. This is quite unfortunate. We need to roll back liability standards. We need to reduce the number of occasions in which individual classes or individuals can bring actions against other parties for recovery on grounds that ignore the operation of the market and broader public interests. Until we achieve that end, however, there will be much greater danger from regulation through litigation than regulation through the agencies.

PROFESSOR CHRISTOPHER SCHROEDER: I took it as the charge of the second panel to offer some comments on the political economy of regulation versus litigation, and perhaps to offer some observations about the relationship between litigation and democratic values. These are two vast topics. I will make three relatively discrete points.

First, in the context of environmental health and safety regulation, the customary problem of agency capture is not an issue. By agency capture, I mean the cozy, symbiotic relationship that exists between agencies and the regulated community or constituent groups. Perhaps that was a major problem in the area of the older economic regulation, but it’s not a major problem with respect to health and environment and safety regulation.

Different standards apply to review of agency rule making in the federal system, but I don’t think you could persuade people at the Environmental Protection Agency or OSHA that their rules have very high rates of survivability. There was a question raised earlier about the joint EPA/New York State suit against Midwestern power plants.14  This suit is a direct result, I think, of the remand in the American Trucking Association case of the ozone standards. Both lawsuits suggest a phenomenon that Jerry Mashaw at Yale and others have commented on extensively: when the rule making process becomes too cumbersome, it drives agencies to less expensive means of conducting their business.15  Those means may be less transparent, less fully participatory than rulemaking through the notice and comment period, and less subject to strictures of reason, decision making, and review. They are, as a result, less desirable than the typical notice and comment process.

There are, then, real problems inherent in agency regulation. Those who are in favor of regulation in the health, safety, and environmental context need to think about supporting measures to modernize the rule making process. Unfortunately, in the last several Congresses, the forces interested in regulatory reform have become intermingled with the forces that are interested in regulatory obstruction. Regulatory reform legislation has become paralyzed as a result. Agency capture, to repeat, is not the problem; regulation varies in laxity and stringency depending on electoral politics. The post-materialist interest in quality of life, health, safety, and environmental concerns have been politically salient for a long time, from Anne Gorsuch Burford to today. Electoral politics has a greater role in the political economy of this type of risk regulation than capture does. Electoral politics, of course, is not the only factor affecting risk regulation. Changes in the budget allocated to enforcement by agencies, appropriations riders, and the appointment process all have a great impact on the efficacy of regulation. These factors are less visible, and therefore are not generally affected by electoral politics.

In terms of public choice considerations, is it better to favor regulation or litigation? This is difficult to tell. There are ways that interest groups can influence the litigation process just as they can influence regulation. This is particularly true in states where judges are elected, but interest groups can play a great role in the appointment process, forum shopping, selective settlement of litigation, and closure of adverse cases from disclosure via settlement. We do not have much research on this issue. However, some research suggests that repeat players in the litigation process have advantages across the board. I suspect that there is an interest group problem with respect to the litigation process that is as serious as the threat posed to the regulatory process, but we simply don’t know at this point which process has a comparative advantage.

Earlier panelists have referred to a democracy deficit, or the conflict between regulatory litigation and democratic principles. It is important here to distinguish between different kinds of litigation. Qui tam citizen suits, for example, do not present much of an issue with respect to democratic values. These whistle-blower suits may create problems with prosecutorial discretion and the Take Care clause, but that’s a separate issue.

Within tort litigation, there is a distinction between cases that build upon and evolve existing common law doctrine and cases that are based on novel rules. Both of them, in some sense, are undemocratic, but this is insignificant; we don’t live in a society or a culture that is purely democratic. Embedded in our system of social organization is a respect for the common law system. As a society, we understand that, within bounds, judicially evolved doctrine and the application of this doctrine to specific cases is a legitimate form of dispute resolution.

PROFESSOR DAVID VLADECK: The question before this panel is one that has vexed those interested in health and safety regulation for a long time. Which institution, the courts or administrative agencies, is best suited to engage in regulating risky private conduct? There is no one answer that fits all circumstances. One point, hammered home today, is that this is not a binary question. Regulation and litigation regimens ought to exist side by side—they serve very different interests.

Consider the Titanic. When the ship set sail, it was in full compliance with all of the then applicable standards for lifeboats, even though there were fewer than half the necessary spaces in the lifeboats for the passengers and the crew. British Maritime authorities, after the crash, changed the standards, but that proceeding took years to complete. The existence of the tort system provided an alternative discipline, an alternative check on commercial activity. Agencies are not capable, alone, of enacting all appropriate regulation. Nor of course do agencies serve the vital compensatory function that is the hallmark of the tort system.

Three general points can be made about regulation versus litigation. First, if one could discount, for a moment, all the problems that plague our administrative agencies, agencies ought to be the first line of policy setters when it comes to consumer health and safety. Agencies have expertise. They are, at least in theory, non-partisan. Agencies are equipped to make the complex judgments that lie at the core of these problems. In a perfect world, we would simply go back to the conception of what our agencies ought to be, which is reflected in the Administrative Procedure Act as signed into law in 1946.

My second point is about the problems plaguing regulatory agencies. It is hard to argue with the position that preventive regulation is preferable to compensatory justice. If you look at today’s agencies, however, they are largely incapable of action. The reason for their immobilization should not escape our attention. Agency capture is still a problem. As much as I respect Chris’ opinion, I constantly see agencies—like the NRC—that work hand in hand with the industries they’re supposed to regulate. Many agencies are no longer “cops on the beat,” using enforcement tools to compel compliance with the law. Why is this the case? Agencies have inadequate staffing and resources. The FDA, with its staff of fewer than 10,000, regulates 25 cents of every dollar spent in the United States. It has responsibility for ensuring the safety and efficiency of every drug and medical device sold in this country; the purity of virtually all the foods we consume (including those we import); the safety of all the cosmetic products we use; and the safety of all medications given to animals. This is a vast responsibility. And fewer than 3,000 of the FDA’s employees worry about enforcement. Further, agencies have a very difficult time obtaining necessary data. In the context of rule making, there is not an agency in this city that has subpoena authority. Agencies are highly dependent upon the industries they regulate to get information.

Staffing and information shortages, unfortunately, are not the only problems. There is a revolving door that sucks away agency expertise. There is OMB interference, an issue that Boyden and I have debated for approximately eighteen years. Congressional interference should not be underrated. Whatever strength the Pillsbury v. FTC doctrine (which nominally forbids coercive Congressional interference with agency proceedings) used to have in terms of insulating agency staff, that doctrine has simply vanished. Talk to regulators: they are constantly being hauled down to the Hill and asked to justify their decisions.

Adding to this list, agencies frequently have to deal with hostile court reception. The “arbitrary and capricious” standard has not been much of a cushion for agencies that are engaged in rule making. Courts now routinely overturn EPA rules; the FDA’s regulation of tobacco products was recently overturned by the Supreme Court, marking the first time that agency ever lost a Supreme Court case; and OSHA rules have fared very poorly in the courts as of late. When faced with hostile judicial receptions, agencies understandably become gun shy. One reason why Ronald Reagan’s OSHA did far more for American workers than Bill Clinton’s is that, in this day and age, agencies are wary of engaging in rulemaking when faced with unreceptive judicial audiences. To take one example, during the Reagan administration, OSHA issued 10 health and safety standards; under Bill Clinton, only 2.

By any measure, the output of the regulatory agencies a decade ago was far higher than it is today. Given this change, it is little wonder that people are going to the courts instead of agencies to address regulatory business. Do litigators overreach? Of course. But they are responding to regulatory failures. Seventeen public school children in D.C. have been killed by handguns this school year alone, and dozens more have been injured, because there is no effective regulation of handguns. No regulatory agency has been assigned that job. And this regulatory void has led to the intolerable situation where, in cities like D.C., kids can get their hands on guns as easily as textbooks. Society has a right not to tolerate that void. It is no surprise that victims of handgun violence are venting their anger and seeking redress in the courts.

Regulatory failure inevitably leads those disadvantaged to seek regulatory solutions from the courts. We now have private litigation instituted by governmental entities to solve broad social problems. Public law is now made, to a great extent, in the context of tort litigation. This explains much of the creative HMO litigation. Congress, by casting a broad protective cloak over the HMO industry, has incited the response that you see through class action suits.

My third point is this: even though it is preferable to assign principal decision making responsibility to agencies, courts are not ill-equipped to engage in risk regulation. Regulatory agencies are a relatively new phenomenon. Courts have been engaged in this type of activity much longer. In some ways, courts are as well or better suited than agencies to perform these tasks—for one thing, they have better access to information. If you look at the asbestos cases, the courts were decades ahead of the agencies in terms of understanding the dimension of the problem and trying to do something about it. The same is true with the Dalkon Shield litigation. Civil discovery is a great engine for truth finding—an engine unmatched in the regulatory context. Courts also have the ability to secure neutral advice through the court appointment of experts. Little of the advice agencies get from experts is unbiased since virtually everyone has a direct stake in the outcome of agency rulemakings.

Courts adapt to revolutionary changes in the market quickly, sometimes more quickly than agencies can. There is a type of diagnostic software that is used frequently in medical procedures. The FDA has been struggling for years with the question of whether it is permitted to regulate medical procedures. The tort system, alternatively, has already imposed appropriate constraints. The notion that only regulatory agencies can effectively impose a sensible discipline on economic activities is simply not correct.

It has been suggested today that the courts’ involvement in risk regulation is new. I have already suggested that it is not. The English Parliament did not give us Rylands v. Fletcher, which held that entities engaging in ultrahazardous activities would be subjected to heightened liability standards. And it was not the New York legislature that created strict liability or abolished the rules of privity in tort cases; it was the New York Court of Appeals, led by then justice Benjamin Cardozo, in McPherson v. Buick. Common law courts for centuries were society’s main risk regulators. The revolutionary changes in the tort law that Professor Schroeder alluded to in his comments came from judges—more specifically, common law judges—trying to adapt the law to new circumstances.

It has also been suggested today that the courts’ involvement in risk regulation is not democratic. There is nothing undemocratic about having our court system involved in risk regulation. There are few institutions in this nation that are as democratic as common law juries. You may not like them because they’re not sufficiently predictable, but they are your neighbors and your friends. Everybody sits on juries. If the juries did not think strict liability ought to be applied, the rules of strict liability would vanish. Common law juries were the principal means of regulating risky conduct until the 1940’s. To make the argument that there’s something inherently undemocratic about this process is simply to ignore history.

MR. THEODORE OLSON: It is interesting that Boyden put the academic people first, and left David and I in the trenches. You will be able to hear the difference because David and I do not use expressions like “circularity,” “normative structure,” “internalizing costs,” “externalities,” or “conceptions of causation.” I will not address those subjects because I don’t think I understand them. I will, instead, talk about some of the trends I see in modern litigation and regulation. Make no mistake about it: courts, juries, and the tort system are taking over the regulatory systems. It is not being done, moreover, in an orderly, systematic, or predictable way. There’s no agenda being set by anybody that’s elected.

The current issue of the National Law Journal 16 describes the top ten jury verdicts in 1999 in the United States. Two years ago, Chrysler asked me to handle a product liability case. It was a 262 million dollar verdict—12 million dollars in compensatory damages and 250 million dollars in punitive damages—in connection with the death of a six-year-old boy in South Carolina. At that point, I think, that was the largest product liability verdict against an automobile manufacturer. Well, we’re just now getting around to filing the appeal, and I think we have been bumped to the fourth largest automobile product liability case. According to the Journal, the biggest award for 1999 was 4.93 billion dollars. That will get anybody’s attention. The next one is 1.2 billion, and then 1.02 billion, 900 million, 600 million, and 580 million dollars. The tenth largest verdict was for 158 million. These amounts apply all to cases across the board—automobile fraud, products liability, and so forth. These decisions, with their immense compensatory damage awards and extravagant punitive damages awards, are the likes of which we have never seen.

If you chart the growth of punitive damage awards sustained on appeal in the courts over the years, you will see a revolutionary change. David may say that this is nothing new, but the largest punitive damage award affirmed by a court of appeal in the state of California until the sixties was $10,000. Now we’re talking about million and billion dollar cases. In addition, there are also class actions. There are also consumer fraud cases brought under various state statutes. Individual cases, simply put, are the instrument for change in regulatory standards. Courts are telling society how manufacturers, insurance companies, and banks should operate. This is not the way the system should work.

Let me mention a few characteristics of the tort system that make it unsuitable as a regulatory mechanism. First, a tort case usually results in developing a broad rule. Yet, verdicts are based upon a single set of facts in a single case. Courts may be able to get all kinds of information, such as David was suggesting in the asbestos case, but most cases involve one set of facts in one incident. The type of information that is available to legislative bodies or to regulatory agencies isn’t usually available in litigation. In fact, the opinions and the data having to do with other circumstances is generally inadmissible.

Secondly, jurors are equipped to be triers of fact. If you study common law history, you find that juries were invented for this purpose; four or five hundred years ago, the juror’s job was to, simply, ascertain what did and did not happen. Juries are ill equipped to be senders of messages to society or to develop broad rules. They have no training for that sort of thing. They do not have the necessary information before them and they consider questions for a short time period. There is typically no public notice, or the opportunity to hear from the public in connection with a particular case. The public, who will be immediately affected by the temperature of coffee or where the fuel tanks are placed, finds out about verdicts in the next day’s paper.

One of the fundamental principles in our separation of powers is that legislators make laws. The executive branch enforces laws, and the courts are there to interpret them. Our Founding Fathers were convinced that a combination of authority in a single agency—be it judicial, legislative, or executive—was the very definition of tyranny. When we have regulation through the tort system or the civil justice system, we have powers combined in one place. This should give us pause.

Notwithstanding what David says, judges and juries are not well equipped at balancing risks. They don’t have the necessary experience. Jurors see a case from a single perspective. If you are considering a case where someone died in an airplane accident, this gives you no basis to make broader, industry wide decisions. Jurors do not say “many people are going to die every year, but we have to be able to get back and forth; therefore, we ought to have these rules.” They do not have that perspective. Doing justice in an individual case is a great deal different than creating a broad, societal rule for a broad segment of the society.

In fact, if a jury were to worry about the broad effects of its decision, it would not be doing the job that it was entrusted to do. Juries are supposed to decide the facts within the constraints of a single case, pursuant to judge-given instructions. If jurors start worrying about after effects, judges will have to start setting aside verdicts because of jury misconduct.

Rules need to be standardized and predictable, but court decisions are post hoc, fact specific, and only occasionally binding on other situations. The uncertainty of litigation makes it ineffective as a regulatory device. Legislative branches, however long they take and however locked up they might be, are bounded. They have timetables. They can render timely decisions. Consider, instead, the uncertainty of litigation. Imagine that we are going to solve the gun or tobacco problem by saying, “Let’s wait until some trial lawyer gets the right case and is properly incentivized. Let’s wait until he is in front of the right jury with the right judge and gets the right verdict.” That is neither certain or time efficient.

In public agencies or legislatures, the people making the decisions are sworn to serve the public interest. That is not the case with judges, juries, or trial lawyers. Trial lawyers are responsible to their clients; they act to bring about the best result in their clients’ interest.

What about David’s argument: agencies are immobilized, they’re paralyzed, they’re being interfered with by the courts and legislatures. At the moment, he says, they are incapable of doing an adequate job. He suggests that we take regulation away from the democratic system where we elect people to make those kind of decisions and throw things up in the air—rules should be decided at random, by relatively capricious judges and juries, and by lawyers who decide to make a lot of money in particular cases.

If our regulatory system isn’t working, abandonment is not the proper solution. I, for one, do not favor switching to something inherently and demonstrably unsuitable because of agency frustration.

MR. GRAY: I’d like to ask the panel a few questions. What, in public choice theory, explains why we have veered to courts to set standards that used to be set by legislatures working through agencies? We can’t figure out how to fix our problems unless we know why they occur. Is it, as Professor Vladeck suggests, because of agency rule making ossification? Is the answer, then, to unleash rule making so it engulfs litigation? Or should we throttle back on regulation?

PROFESSOR PRIEST: The courts have adopted open-ended legal standards that allow cases to be brought and claims to be made that would have been impossible 20 years ago. This explains much of current litigation. There is also something to be said for public confidence—or lack of confidence—in agency regulation. If a jury were convinced that a regulatory agency standard was adequate and created the appropriate level of safety and protection for consumers, it would not be as willing to find liability on the part of a manufacturer that complied with the standard.

Instead, plaintiff attorneys have been very successful, in case after case, by arguing that regulatory standards are minimum standards only. They have convinced jurors that higher standards should exist, standards that would have prevented the accident in a particular case. These attorneys are armed with a theory of law—strict liability—that has been developed in a way that does not look at what the manufacturer did or whether the manufacturer’s decisions were reasonable. It considers, rather abstractly, the nature of the product. That general approach has been extended to contexts well beyond products liability.

In sum, we have a system where there is increasing opportunity for plaintiffs’ attorneys to bring cases and obtain recoveries. The defining standards of the law are open ended, much more open ended than the standards of economic regulation. This has led to the greater range of litigation.

MR. GRAY: It seems to me that the development of these new standards predates agency ossification. What I’m trying to ascertain is whether regulation by litigation is related to frustration with agencies. I don’t think they are related, myself, but I’m trying to get your opinion.

PROFESSOR PRIEST: I actually think there is a parallel: The adoption of strict liability and the expansion of standards of legal liability began to occur at about the time that the public was also supporting the creation of regulatory agencies dealing with public health and safety. OSHA, the Consumer Product Safety Commission, EPA, as well as NHTSA and other various commissions were created about the same time that these legal standards were changing. There was a general movement, in judicial and policy making contexts, towards greater incentives for safety. This was manifested in specific ways in the agency regulation realm, and in far more open-ended ways in the legal system.

MR. GRAY: Let me raise the topic of court/agency relations. During the last eight years or so, two-thirds of EPA’s rules have been judicially invalidated. This activity has been primarily by one court, the D.C. Circuit; nevertheless, the litigation used there is available to environmental groups, business groups, or consumer groups. Public Citizen can use these just as the Chamber can. The EPA has been rebuffed, and rebuffed with frequency; the judiciary is saying, in essence, that the agency has gone too far. I am having trouble understanding this situation. Courts, according to Professor Priest, are open-ended, however the EPA is repeatedly remanded. I don’t know what trend means what and who’s doing what to whom, or what legal system is operating where in which instance. I find the whole thing confusing.

So here, the agencies are not effective. I look at the FDA. There is a user fee paradigm now where the drug companies pay in effect for their own drug reviews. And the problem with the FDA is not that they’re not getting enough drugs out at the moment. The problem is with the health care system; they may be getting too many drugs out. And certainly that’s what Ralph Nader has always argued, that there are very few drugs that ought to get approved under any circumstances.

The SEC, for example, is dealing with an incredible volume of material and doing it in a remarkable way. If you look at the banking system versus the mutual fund system for allocating capital, banks do about a trillion dollars worth, mutual funds maybe the same. The banking system has 14,000 regulators and the mutual funds have 400 regulators, and which does a better job? My vote is with the SEC. I think the banks are doing much better now, but we had a terrible recession and the Japanese are still struggling with their S&L crisis. I might also add, despite my anguish over the years with David Kessler, the FDA also does a pretty good regulatory job.

MR. SCHROEDER: One thing your remarks point out, Boyden, is the need to subdivide this topic. Different regulatory agencies and different risk problems are associated with different causal explanations. There are, and should be, different reform strategies and there will be different problems in their implementation.

I work primarily in the environmental area. There has not been much of a regulation by litigation explosion here in the open-ended court sense: toxic tort cases have not been very productive. We’ve got a lot of environmental litigation, but it’s mostly statutory driven. Much of it was created by Superfund or by citizen suits.

If you look at the product liability area, you get a different set of problems. In that context, ossification of the rule making process and the explosion of risk related litigation in the courts are perhaps causally related. But I also believe that jurors have a sense that the regulatory system has become stagnant. While people here at the Chamber—and elsewhere—might like to cabin the open-ended standards of the litigation process, reform is politically a non-starter until there are regulatory changes. Litigation looks far more attractive to many people at the moment; it does, after all, appear to be solving many public problems. It seems far preferable to a regulatory system that seems to be moving nowhere—one in which people have little confidence. At least at the level of reform strategy, litigation and regulation are related.

MR. GRAY: In terms of political popularity, I’m not sure if the tort regime is very popular. We used to say, back in the old days of the Illinois brick fight, that shouting “lawyer” on the floor of the House of Representatives is like shouting, “fire” in a crowded theatre. Perhaps the tort system is popular at the grass roots level—I defer to people who have been dealing with this issue.

PROFESSOR VLADECK: I don’t know if the debate should be defined in that way, Boyden. I think it should be defined as a flight from accountability. One of the things I find disturbing in Ted’s presentation is that, after succeeding in dismantling the regulatory state to a large degree, he—

MR. GRAY: You give us much too much credit.

PROFESSOR VLADECK: All right. Having succeeded in at least obstructing the regulatory state, Ted now complains that we ought to throttle back the tort system. This, to me, translates into a plea of “just let us be unaccountable.” That is an argument that simply will not fly. It is not a politically attractive message, but it also is not a responsible message.

To what extent is the failure of the regulatory process attributable to the rise of the kind of litigation that Professor Priest rightly criticizes? It seems to me that the relationship is significant. It is not, however, the only problem. Congress bears some responsibility in this debate. I find it odd that we talk about institutions of government that are involved in risk regulation and we focus exclusively on agencies and courts. No one has talked about Congress. Many of the problems that have led to maverick litigation are problems that ought to have been addressed, in the first place, by Congress.

But it seems to me that the problem that we have to wrestle with is this: if there is a consensus that regulation, not litigation, should be society’s first line of control over hazardous activities, then the agencies should be entrusted with that function and unshackled so they can perform it. How do we return the agencies to the position where they can actually engage in responsible rule making? I just don’t think there’s a credible argument that the health and safety agencies these days are up to the task.

PROFESSOR GEORGE PRIEST: We should be clear here: I’m not asking to get rid of the legal system. I don’t think that any proposal, even tort reform proposals, are trying to eliminate accountability. I do think, rather, that we should try to eliminate those excessive features of the system that have no productive purpose with regard to accountability in terms of increasing safety. I do think we should retain those features of the legal system that provide appropriate incentives for safety.

Our legal system has expanded very dramatically in recent years, even far beyond what verdict statistics show. If you look at the number of lawsuits and the amount spent on legal resources, there has been a vast expansion from the 1970’s to today. There is not a single shred of evidence—I’ve done studies, Kip Viscusi has done studies—that would suggest that that litigation has had the effect of increasing levels of safety. Of course, it’s difficult to distinguish the effects of litigation from market and regulatory effects, but one would think with a phenomenon of this magnitude that there would be some empirical evidence of increases in safety that would differentiate the effects of litigation from typical market forces. Nobody can find any effect.

We do not have enough time to talk about how to redesign the legal system. I repeat, however, that I am neither trying to get rid of the legal system nor eliminate accountability. I believe in accountability. I believe in trying to define a legal system that does no more than optimize safety. That would eliminate a great deal of the modern litigation that I think basically serves a solely redistributive end.

MR. GRAY: Let me follow up, David, about your comments on the responsiveness of Congress. Are you suggesting that maybe Congress is bought? Are you suggesting that there is too much money in the system, and, therefore, Congress can’t respond to these problems? I would argue that if you look at the state level, at tort reform, what you have is too much money—campaign contributions—sloshing into the funds of judges who are elected. And, you know, what’s good for the goose is good for the gander.

I’m not sure I know where the responsibility lies. There are several state supreme courts that have gutted state legislative reform in regards to punitive damages, joint and several liability, and liability. Legislative rules get rejiggered by the supreme courts and by judges who are elected with a lot of campaign finance help. Perhaps the answer is to alert the other side—maybe they ought to get into the fray, too, and get their own judges.

PROFESSOR VLADECK: Well, that is what happened in Alabama. If you followed the election of the Alabama Supreme Court, it was a race to the bottom, and the business community won that one this time around.

MR. GRAY: This time around?

PROFESSOR VLADECK: Yes. If you follow Texas politics, you know that Texas has elected judges as well. There are shifts back and forth in terms of which side captures the judiciary. The ABA has done an in depth study on the question of whether judges ought to be elected or not, and I think they’ve reached the conclusion that there ought to be very substantial changes in the way judicial selection laws work at the state level. I don’t disagree, Boyden, with your observation that there are problems in the state court systems.

MR. GRAY: Maybe we ought to open things up to the audience.

AUDIENCE MEMBER: Let me cut to the chase. What would each of the speakers assign as the principal function of a regulatory system where we’ll have both courts and regulatory agencies? Which principal functions would you assign to each one, and, under the current environment, which one or two reforms do you think would most likely help that institution perform these functions?

PROFESSOR PRIEST: It is very hard to put this succinctly. I think the regulatory system should deal with what we agree is market failure; it should step in when competition is seriously impeded. I’m not sure this applies to the wide range of safety and health regulations we have now—I think we underestimate the value of the market in this area. The common law system is similar: it exists to create additional incentives where there has been further market failure. It is a safeguard when incentives that are created by the market for the production of safe products have failed in some way.

MR. SCHROEDER: The theoretical explanation for why the two regimes exist side by side in the drug system is this: the regulatory system, if it’s operating correctly, balances safety benefits in a cost benefit structure. It asks if the risk to the population outweighs or does not outweigh the benefits given. That is a separate question from, when something goes wrong, whether there ought to be a transfer payment from the producer to the victim. One is a form of efficiency analysis that says it’s okay to go ahead with the product if it’s potentially possible to make a transfer from the beneficiaries to the victims that would leave the victims as well off and still leave a net benefit to the beneficiaries. The tort system, if you wanted it to operate as a supplement to that system, would simply say, “Let’s make the transfer. Let’s not make it hypothetical; let’s make it actual.”

To respond to the question from the floor, I think the core area where regulation is going to remain essential is in the area of diffuse harms, particularly in the environmental context. It is impossible here, or very difficult, to prove individual causation. We’re essentially talking about the production of public goods or the prevention of public harm; collective decisions should be made about what goods should be produced or harms prevented. As far as reform measures go, we have not talked much today about the different regulatory instruments that are available.

This morning, the panelists were assuming a system of regulation in the old fashioned style of command and control. There is another style of regulation. An example is the acid rain program that Boyden Gray was instrumental in inserting in the 1990 Clean Air Act. Here, a collective decision establishes the level of the social good or social bad. Then a market-based incentive system is allowed to operate that makes allowances or licenses to pollute available after an initial allocation, available for a transfer or reallocation among the sources.

That acid rain system of regulation has not functioned ideally, but it has functioned at a level that most analysts have said is much more cost effective than the command and control structure. That sort of blending in the area of diffuse harms gets you close to the appropriate role for collective decisions. It also gets you close to the appropriate role for getting the incentives right at the private level; entrepreneurs can figure out cost effective means of achieving their objectives either by selling excess allowances, purchasing them on the market, or making intrafirm transfers among their different pollution sources. This is a model that the EPA has done some experimentation with. It is a strategy that ought to be given increasing attention as we address future problems.


1 Agent Don Clark directed the investigation of former Attorney General Dan Morales and the five attorneys who obtained the state’s $17 billion tobacco settlement. He is currently employed as an investigator by O’Quinn & Laminack, the firm of Morales Five member John O’Quinn.

2 Daniel Kessler and Mark McClellan, Do Doctors Practice Defensive Medicine? 111 Q. J. Econ. 353 (1996).

3 See, for example, W. Kip Viscusi et al., Deterring Inefficient Pharmaceutical Litigation: an Economic Rationale for the FDA Regulatory Compliance Defense, 24 Seton Hall Law Review. 1437, 1476 (1994) and Kip Viscusi, Alarmist Decisions with Divergent Risk Information, 107 Econ. J. 1657, 1657-58 (1997).

4 Punitive Damages: The Social Costs of Punitive Damages against Corporations in Environmental and Safety Torts, 87 Geo. L.J. 285 (November, 1998).

5 W. Kip Viscusi, “Corporate Risk Analysis: A Reckless Act?” Stanford Law Review, Vol. 52, No. 3 (Feb. 2000), pp. 547-597.

6 This piece was later reprinted in the Harvard Law Review; see Historical and Practical Considerations Regarding Expert Testimony, 15 Harv. L. Rev. 40 (1902).

7 Daubert v. Merrell Dow Pharmceuticals, Inc, 509 U.S. 579 (1993).

8 General Electric Co. Et Al . V. Joiner, 522 U.S. 136 (1997).

9 Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999).

10 A. Mitchell Polinsky and Steven Sharell, “Punitive Damages: An Economic Analysis,” Harvard Law Review, vol. III, No. 4 (February 1998).

11 Chevron U.S.A. v. Natural Res. Def. Council, 467 U.S. 837 (1984).

12 Geier v. American Honda Motor Co., docket number: 98-1811, cert granted September, 1999. The issue before the Court: does the National Traffic and Motor Vehicle Safety Act, which called for a slow phase-in of airbags, pre-empt a consumer’s right to sue an automaker in state court for not installing an airbag?

13 Avery et al. v. State Farm Mutual Automobile Insurance Co., No. 97-L-114 (IL Cir. Ct., Williamson Cty) Oct, 1999. In January, State Farm filed a motion for direct appeal Illinois Supreme Court.

14 Eight states, including New York, filed petitions with the EPA under Section 126 of the Clean Air Act to address air pollution transported from upwind states. In November of 1999, the Justice Department, on behalf of the EPA, filed seven lawsuits against electric utility companies in the Midwest and South, charging that seventeen of the companies’ power plants have illegally released dangerous levels of air pollutants. The Tennessee Valley Authority is also being sued.

15 See, for example, Mashaw’s Greed, Chaos, and Governance: Using Public Choice to Improve Public Law (Yale University Press, 1997).

16 “Raising the Bar,” National Law Journal, February 28, 2000.



Center for Legal Policy.



This book addresses questions relating to the growing trend of using the courts to dictate national policy on controversial and divisive social issues.


Opening Letter

Panel One: Litigation or Government regulation?


Todd Buchholz, Economist and Author

Honorable Guido Calabresi, U.S. Court of Appeals, Second Circuit

Professor Daniel Kessler, Associate Professor of Economics, Law, and Policy,Stanford Graduate School of Business, Stanford University

Professor W. Kip Viscusi, John F. Cogan, Jr. Professor of Law and Economics,Harvard Law School

Edward Warren, Partner, Kirkland & Elli


Panel Two: A Public Comparison of Litigation and the Regulatory State


Honorable C. Boyden Gray, Partner, Wilmer, Cutler & Pickering

Professor George Priest, John M. Olin Professor of Law and Economics, Yale Law School

Professor Christopher Schroeder, Professor of Law and Public Policy Studies,, Duke Law School

Professor David Vladeck, Georgetown University Law Center, Director, Public Citizen Litigation Group

Honorable Theodore Olson, Partner, Gibson, Dunn & Crutcher



Center For Legal Policy Conference
Co-sponsored by the Center for Legal Policy at the Manhattan Institute
The Federalist Society
U.S. Chamber of Commerce Institute for Legal Reform


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