Custom «Product Liability Debate: Who Should Bear the Risk» Essay Paper

Introduction

Clash of interest exists between manufacturers of products and users with regards to who should bear accident risks caused by the products. Whereas manufacturers insist on that products would not be harmed when used, according to the directions given, consumers have found themselves as victims of the product use. As Andre & Velasquez (1991) observe, “34 million people are injured or killed as a result of product-related accidents.” The worrying statistic is that the rate of deaths caused by product-related accidents is getting higher than deaths caused by heart diseases or cancer. Moreover, the cost of accidents caused by product-related accidents is approximately $12 billion every year (Andre & Velasquez, 1991). The increasing cases of lawsuits against firms that manufacture harmful products are threatening the survival of some companies. This may file bankruptcy to end operations. The debate on who should bear the risk of product-related accidents has emerged; hence, this essay establishes who should be held responsible.

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The Debate

Manufacturers Should Bear the Risks

The individuals, who support the idea that manufacturers should be held responsible for product liability when they harm consumers, argue that value of life is more important than the costs incurred. There are numerous occasions when products cause harm to the consumers in big numbers. The society ought to emerge from its laxity and reduce the liability of ineffective products. “Without the threat of liability, manufacturers would have little incentive to ensure products safety, and the number of product-related injuries would escalate” (Andre & Velasquez, 1991).

Those who support that the manufacturers should bear the risks of accident-related products claim that the numbers of lawsuits reported are exaggerated. The main victims of product-related accident are few pharmaceutical and asbestos companies, whose cases cannot be used to generalize the liability of all manufacturers. According to Andre & Velasquez (1991), it is not right to purport that local companies should be made less competitive due to product litigation in the global market. Likewise, foreign business organizations operating in the US ought to respect local policy provisions abided by American firms. All firms have the same advantages when competing with others in the international market.

Manufacturers should be held liable for product-related injuries because justice is in their side. They have the say in whatever injuries are caused because they directly engage in the entire production process of such goods. This is because “justice requires that the party that is the most able to pay for an injury be the party that bears most of the financial burden” (Andre & Velasquez, 1991). For instance, upon introduction of a new item in the market, manufacturer should be the bearer of the liability risk because they are well aware of such risks in the first place. Moreover, the manufacturers have the capacity to invest in research and development (R&D), laboratory experiments, technical and engineering skills, and the ability to assess the risks involved in creating a new and safe product. That is why people think that consumers should bear the risks; however, they lack the ability to do the things mentioned above. 

The notion that consumers bear the freedom to make a choice on whether to buy a product or not is misplaced because no one can make a choice to buy a harmful product. While others have inadequate access to product information to understand what they buy, some consumers are woefully ignorant. As a result, it is the manufacturer’s choice to declare safety of a product even if that would compromise the market of a product. Consumers should be protected from the liability risks by adopting less complex bureaucracies in the insurance system. This is a problem because “Product liability and competition of industrial injury insurance relation has no clear rules” (Lin, Chen, Yingli & Zhu, 2012, p.274).  

Consumers Should Bear the Risks

Manufacturers support the idea that it is the liability of the consumers to bear the risks associated with product-related accidents because of the overwhelming costs of taking full responsibility. In the past five decades, there was a steady increase in lawsuits involving product liability. As Andre & Velasquez (1991) posit, “13,500 product liability suits were filed in federal court in 1986, compared to only 1,500 in 1974.” There is an increasing cost of doing business in the current business environment due to surging cost of insurance to after the litigation of consumers’ complaints.

The product liability suits are not only a problem to manufacturers, but also to the national economy. This is due to scaling down of business operations from the numerous lawsuits filed against manufacturers. Scaling down of operations has ripple effect on the economy, as the workforce has to be cut down significantly. Moreover, many lawsuits against local American firms have led to decreased competition of the local firms with international firms because foreign firms have less severe considerations for the lawsuits. Hence, the companies can create products at lower costs than American firms can.

The fear to introduce new life-saving drugs and other high technology products in the market scuttles innovation of the manufacturers (Baram, 2007). “One report found out that 39% of the companies surveyed delayed introducing new products or had discontinued products because product liability suits” (Andre & Velasquez, 1991).

The fear of cost liability will make manufacturers invent more in testing of products, something that will further raise the cost of production and delay the product launch into the market.   

Manufacturers contend that it is unjust for the society to hold them liable for injuries caused by their products when this is not at their best interest. The essence of creating a new product is to satisfy the consumers, and any injuries caused by the products are highly regrettable. Manufacturers had tried their best to give directions on how to use their products for safety reasons by pasting instructions on every product line. As Geistfeld (1995) notes, “brand-specific risk levels are unable to observe any safety investments a particular manufacturer has made that exceed the average, or observable amount for the product class in question.” (p. 243).

Lastly, in a free market economy, manufacturers have the responsibility of making products that meet their expectations, and consumers have the discretion of deciding what to buy. This argument is improper because as much as there is right to make any product, safety is the standard that should be present when releasing a product into the market. Lin et al (2012) supports that “Strict liability doctrine can help to realize the goal of inherent safety” (p. 275). This is because the relaxed product liability system had resulted to decline in safety standards in industrial enterprises.

The Verdict

The arguments highlighted in this paper blame both the manufacturers and the consumers in varying proportions. One thing that is certain is that the consumers cannot be responsible when the product they consume causes injury, accident, or even death. They are not involved in any production process and cannot bear liability in whatever scenario. This, together with the reasons given in the debate, justifies that the manufacturer should bear the product liability cost. However, the financial and economic costs of product liability are harmful in many wars. It is improper for a single lawsuit to rule that GM should pay $4.9 billion for the plaintiff to bear liability of accident caused by a car (Shavell, 2007). Moreover, strict laws against manufacturers discourage innovation and launch of new products. To reduce the financial losses incurred by manufacturers and the economic damage in the product market, both manufacturers and consumers should have legal provisions that reduce the liability costs.                    

Understanding the Financial Implication of Product Liability

Just to have a glimpse of the cost incurred by manufacturers in litigation claims, the table below offers a breakdown in only one industrial sector. The figures indicated have been taken from motor vehicle manufacturers liability costs for injuries caused to product users.

Source: Yelkur, Morrison, Steiner & Schmehl, (2001), p.65

The table below gives the financial liability incurred by the manufacturers in only the motor vehicle manufacturing industry. The figures would tremendously increase if pharmaceutical firms were added (Bright, 1999). Despite the arguments posited in the debate above, it is critical to develop the financial risk bearing system that would spread the risk to both parties (Veld & Hutchinson, 2009). Despite the loss of lives through injuries caused by products, financial implications of the liability affect the economy. Hence, there is a need of developing a risk-sharing policy.

Use of Corrective Taxes

This concept is developed to help in reducing liability by alleviating judgment-proof problem. When the likelihood of injuries by product is kept low, injuries expected will fall below the actual injury caused. The main problem facing manufacturing in the liability debate is that they bear the liability cost. The corrective tax system tries to lessen the burden to the firms by paying appropriate tax when they initiate risk-creating behavior, instead of paying for the total damages. Taking an example of a firm that pollutes the environment with an estimated $1 million with a 1% probability,

Thus a firm with $100,000 of assets would be able to pay $10,000 for the expected harm, it would cause were it to cause the pollution, even though it would only be able to pay one tenth of the actual $1 million harm it might generate, and so its incentives to reduce risk would be much too low under the liability system (Shavell, 2007, p.171).

Product Recalls

The product market across the globe has strongly reacted towards product liability and injury risks posed by the products. As discussed above, the manufacturers commit hefty investment in R&D to review the likelihood of their product to cause unforeseen injuries. In order to react to potential threats of product-related injuries, firms have resorted to product recalls once a potential problem is noted. Nonetheless, this initiative also depends on the financial sustainability of recalls and the impact they may have on the global economy. The US and China are the two biggest economies in the world; hence, this research deems it necessary to review product recalls in the two economies and their impacts.  

The stock markets react differently to product recalls. China stock market reacts strongly to recall announcements leading to low stock prices, compared to the United States stock exchange. According to Zhao, Li & Flynn (2012), “The average abnormal return is less than -1% in most US studies, while the mean abnormal return in Chinese market was -2.21%,” (p. 6). The automobile industry was the first in China to recall products back in 2004, at a time when communication of recall messages was mainly done of the traditional media platforms. There were no developed company websites to communicate such information in real-time. The pharmaceutical industry, and food and electronic industries did not initiate product recalls until 2007. However, the US has five federal agencies that are obligated to make product recalls. The recall system in the US is well-developed, if compared to that of China. The US had the first product recall in 1966, and now the country exposes its consumers to recall announcements even for small defects. Whereas in China recalls are still considered as peculiar, in the US the public is well-versed with product recalls. This explains why the stock markets respond differently to product recall announcements.  

As discussed above, the financial consequences of product liability are overwhelming, and either way, both manufacturers and consumers need protection (Veld & Hutchinson , 2009). In the US, the product liability clauses are very strict to the producers, but lenient with the consumers. This situation does not benefit the economy due to the financial difficulty and economic reasons stated in this paper. One way to address the interest of both parties is to encourage the manufacturers to exempt them from the liability when they warn consumers on their product. According to Calcott (2008), “Incentives for consumers to follow manufacturer warning can be provided with a rule of contributory negligence instead. Exculpation can lead to a signal effect when manufacturers have insufficient incentive to warn” (p.103). The law should provide for effective neutralization of manufacturer warnings by strictly calibrating the damages. Moreover, courts should be willing to rule against such cases, as long as they are sufficiently supplied with the producers’ information on a product and its underlying risk. This kind of legal intervention identifies the role played by both parties in resolving the liability issue, and as such, it provides a leeway to develop laws that compel both manufacturers and consumers to mitigate risks.     

Conclusion

Product liability is an issue that raises concerns for manufacturers, consumers, and society. The discussion above has elaborated on the manufacturers’ take on why consumers should bear the cost of product-related injuries and vice versa. Every party has a role to play: manufacturers, consumers, the state, and courts should all unite in determining the best solutions to the debate and the repercussions of product liability to the economy. While American firms lose their competitiveness in the global market, strict liability policies on manufacturers discourage innovation. The damage to the economy also warrants responsive measures from all the parties. In order to address the problem effectively, the state should implement legal provisions that will help in lowering the burden of product liability from the manufacturers.