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Federalism and Tort Law May 2, 2007

Posted by federalist in Government Regulation, Judiciary, Markets.
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Michael Krauss’s summary essay in the WSJ today led me to his wealth of scholarship on issues of liability that cross govermental jurisdictions, including his analysis with Robert Levy, “Can Tort Reform and Federalism Co-Exist?

At present our nation’s tort laws add a liability premium to all commercial transactions. When you buy something you pay the fair market value of that good or service, plus something extra to cover the seller’s liability insurance. Krauss writes, “Outlays, including the costs of litigation, consume upwards of 2.8% of GDP, and the share of that going to plaintiffs’ lawyers is roughly $50 billion.”

2.8% may not seem like a very high fee to keep our goods and services safe. But it is not levied evenly: We know of plenty of legitimate industries that have been destroyed in the past (asbestos, private aviation) or that even now are in mortal danger (healthcare, firearms, chemicals) from tort law.

Besides, the nature of tort law in this country — what with forum-shopping and interstate commerce — is such that the most costly state regimes are imposed on everyone.

Suppose, however, a federal law declared that the laws and rules governing product liability applicable to a given product are the rules of the state where that product was first sold at retail.

Thus, if a West Virginian bought his lawn mower in Maryland, it would be Maryland law that determined product liability, even if an accident involving an alleged defect happened later in West Virginia. (Labeling is generally easy and would provide reliable identification of the state of first sale.) Manufacturers could now price goods in each state to reflect that state’s liability rules — allowing consumers to pay for the liability protection they wanted. Competition would provide consumers with knowledge of what this all means. West Virginia retailers would have a keen incentive to explain to consumers how they receive greater protection — in return for a higher purchase price — much as current retailers of name-brand products have an incentive to stress the reasons why the brand they sell carries a premium price as compared to generics.

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