Table of Contents

• Government as the Proximate Cause and “Last Clear Chance” Avoider of Toxic Harms
• Changing and Varying Liability Rules and the “Rush For Property Rights”
• Conclusions
• Refrences
• Footnotes

The explosion in the number of toxic tort suits filed against private firms suggests that the toxic tort issue is a problem of “market failure” (Trauberman 1983, pp. 3–7); that is, the toxic tort problem apparently arises because private firms create significant negative externalities in the form of health costs for their workers, their customers, and/or their neighbors, either intentionally or through avoidable negligence (or, given strict liability, through simply existing). Thus, toxic tort litigation presumably involves an appropriate use of the government courts to correct for market failure. The facts are quite different from these presumptions, however. A substantial portion of the “blame” for the toxic tort explosion actually should be placed on government entities. Indeed, the rapid growth in toxic tort litigation is largely a reflection of government failure, rather than market failure.[A]

There are, in fact, several dimensions to this government failure, just as there are multiple dimensions to the toxic tort problem. The costs of toxic torts may include tragic consequences for human health and human life, although the scientific community is clearly divided as to the validity of alleged toxic harms. But whether there are real harms or not, the costs of the toxic tort problem clearly include investments in avoidance of future toxic exposure through greater care in the production and use of toxic products, cleanup efforts for toxic dumps and spills, the production and dissemination of information about toxic risks, and dispute resolution that arises following allegations of toxic exposure. Government failures have raised all of these costs.

The following presentation focuses on only two of the many types of government failure that contribute to the toxic tort dilemma. The first section explains that as a major demander of toxic products and a major producer of toxic waste, the government often is the most proximate cause of whatever toxic harms may actually exist. Further, when government immunity from tort liability applies, government decision makers have incentives to be relatively unconcerned about disseminating information and warning potential victims of potential toxic harms. Assuming that exposure to toxic substances does generate harms, the negative externalities that arise from government use of toxic substances and creation of toxic waste tend to be relatively costly compared to the harms arising from activities in which tort liability applies. In addition, government immunity is being extended to firms who contract with the government, and as this occurs, those firms will also have weaker incentives to warn.

A less obvious negative externality from government action, but one which gets to the heart of the explosion in toxic tort litigation, is examined in the next section. Government claims the authority to be the source of “the rules of the game”—property rights, liability rules—under which market players pursue their goals. Stability in liability rules characterized tort law up until about 30 years ago, but rapid and sharp changes in liability rules, as well as variations in such rules among legal jurisdictions, characterize tort law of the last three decades. This has created a negative externality in the form of uncertainty. The result is analogous to turning private property rights into common-access property rights. Uncertainty about liability rules has made the property rights to the assets of producers in the United States less secure, so other parties have incentives to “rush in” and lay claim to the insecure property rights by filing lawsuits.

One consequence of this common-access resource problem is that “overuse” or “crowding” occurs as the magnitude of the claims exceeds the value of the assets. The resulting mass tort litigation problem means that standard common-law tort solutions (assessing negligence and apportioning the full cost of damages according to some negligence rule) generally will not work. The courts are overwhelmed with the mass of litigation, causing delays, high administrative costs (e.g., legal fees that can actually exceed the payments to victims by significant margins), and injustices (e.g., through nonconsensual consolidations, coerced settlements, and violations of due process by multiple assessments of punitive damages). Indeed, even though discussion of toxic torts often focuses on alleged health costs or cleanup costs and who should bear them, a substantial portion of the social costs of toxic torts arise from dispute resolution itself, a cost which is relatively high because of government failure.

There are many other types of government failure that have toxic tort implications. For instance, government laws can lead to greater exposures to toxic substances in at least two ways: (1) liability rules established by statute and/or court precedent can provide incentives for firms producing and using a potentially toxic product to be unconcerned about health problems (e.g., the government contractor defense alluded to above as well as others), and (2) the government may legislatively mandate actions that put people at significant toxic risk. Examples of these and other negative externalities from government actions will be discussed in the context of the primary issues examined in the first two sections, but only tangentially. Additional examples will be mentioned in the concluding comments of the last section in order to suggest the potential scope of the role of government failure in toxic torts.

Government as the Proximate Cause and “Last Clear Chance” Avoider of Toxic Harms

Government agencies may be the largest single source of demand for potentially toxic substances. They use large quantities of allegedly toxic products in ways that put people at risk, often without warning the parties at risk or even acknowledging the risk. And yet, the government is often immune from tort liability (Federal Tort Claim Act [1946]; Feres v. United States, 340 U.S. 135 [1950]). Indeed, even if the government is not immune, the actual decision makers responsible for exposing others to toxic harms are likely to be largely immune. After all, any monetary damages paid by the government are extracted from the tax-payers rather than the decision maker. This immunity means that government decision makers have relatively weak incentives to warn others about the hazards that government activities are creating, thereby perhaps actually increasing the exposure to potential toxic substances, and the level of health damages and/or deaths that follow. When general government immunity applies, injured parties have little recourse but to sue the companies that supplied the products to the government.[B]

An Example: Agent Orange[C]

Agricultural chemical research had produced a number of synthetic compounds to regulate and suppress plant growth as early as the 1930s, but much of the research on herbicides has actually been undertaken by the U.S. Army. During World War II, the U.S. Army performed defoliant research at Fort Detrick, Maryland, where a number of defoliant compounds, including 2,4,5-T, were formulated (Schuck 1986, p. 16). The compounds developed by the army were regarded as more effective, easier to apply, and safer than existing weed killers, so after the war, they were made available to the private sector. The army continued to successfully test large numbers of herbicides in the laboratory and in the field, and by 1960, sufficient evidence was available to convince President Kennedy to approve Operation Hades (later called Operation Ranch Hand), in which various mixtures (called Agents Blue, White, Purple, Green, and Pink) of 2,4,5-T, another powerful herbicide—2,4-D—and other chemicals were sprayed on the jungles of Vietnam by low-flying C-123 aircraft. As U.S. involvement in the war increased, so did the defoliation efforts. Agent Orange, consisting of equal parts of 2,4,5-T and 2,4-D, was introduced in 1965. Several chemical companies were compelled to provide the army with Agent Orange under the Defense Production Act (Glasser 1986, p. 514).[D] Agent Orange was very effective and largely displaced Agents Pink and Green, although White and Blue continued in use. The application of Agent Orange intensified after 1965, reaching a peak of 3.25 million gallons in 1969. Use of Agent Orange ended in 1970, but by then 11.2 million gallons had been sprayed over about 10 percent of South Vietnam’s land area.

Potential dangers of herbicide toxicity in general and of Agent Orange in particular had been known by army officials for some time. Monsanto Chemical Company, one of the largest producers of Agent Orange, informed army officials that 2,4,5-T was contaminated by a toxic substance as early as 1952. A 1963 army review of toxicity studies of 2,4,5-T concluded that there was an increased risk of chloracne (a severe but often treatable skin condition) and respiratory irritations, and that this risk was heightened when the chemical was applied in high concentrations by inexperienced personnel. Indeed, the army knew as much, and probably more, about the potential dangers of these herbicides as any company that manufactured them. The Joint Chiefs of Staff were also informed of possible health dangers of herbicides by the President’s Science Advisory Committee in 1963. Thus, knowledge of potential dangers also existed outside the army in the executive branch. President Johnson’s Science Advisory Committee apparently discussed the potential toxicity of 2,4,5-T in meetings between April and June of 1965.

The National Cancer Institute contracted with Bionetic Research Laboratories in 1965 to study the potential toxicity of a number of herbicides and pesticides, including both 2,4-D and 2,4,5-T. A preliminary report on that research was filed with the National Cancer Institute in 1966, indicating that 2,4,5-T caused birth defects in mice and rats where mothers had been exposed to relatively high levels, and that 2,4-D was also potentially teratogenic. However, these findings were not publicly released until 1969, when a scientist and opponent of the defoliation program leaked them to Ralph Nader, and also convinced President Nixon’s science advisor to convene a meeting of scientists to discuss it. Prior to this, the army had denied (perhaps correctly, as noted below) that any serious danger existed, and while some officials insisted that the exposure levels in the experiments were much higher than what military personnel in Vietnam faced, the army temporarily suspended all military use of 2,4,5-T, including Agent Orange, on April 15, 1970. They never reauthorized its use.

In light of evidence such as that just outlined, Judge Pratt, in reaching summary judgment on the chemical companies’ government contractor defense in the early stages of the Agent Orange mass tort litigation (see Schuck 1986 for a detailed examination of this case), concluded “that the government and the military possessed rather extensive knowledge tending to show that its use of Agent Orange in Vietnam created significant, though undetermined, risks to our military personnel” (quoted in Schuck 1986, p. 99). Similarly, Judge Weinstein, who took over the Agent Orange case from Judge Pratt and ultimately forced a settlement, found that the government had a central role in the Agent Orange case, and that liability could not be fairly determined without the government’s active participation; he noted that it was “not unlikely [that] the information necessary for an informed decision on Agent Orange was readily available to the government while it was ordering and using [it]” (quoted in Schuck 1986, p. 182). Indeed, Judge Weinstein felt that the government may have known even more than the chemical companies about potential adverse effects of Agent Orange (Schuck 1986, p. 251), and he is reported to have said that litigating the Agent Orange case without the government being involved was “like playing Hamlet without the Prince of Denmark” (Shuck 1986, p. 58). Therefore, he was of the opinion that the best way to achieve a solution to the case was for the Veterans’ Administration and Congress to be brought into it, but that “we cannot do that because of limited jurisdiction. The intelligent way to handle it would be if there is any liability [on the part of the chemical companies, for]...the VA to take over the whole thing, then to just have the manufacturers make a lump sum donation paying the cost of the damages, if any, attributable to Agent Orange” (quoted in Schuck 1986, p. 115).

Despite evidence of substantial knowledge of potential health hazards of Agent Orange on the part of government officials, the government denied virtually all liability. As Schuck (1986, p. 24) noted, for instance, “If the VA had one principle firmly embedded in its bureaucratic mind, it was that any problems suffered by veterans exposed to Agent Orange...were not, with the exception of chloracne, caused by the herbicide.” Similarly, as Judge Weinstein worked to force a settlement in the Agent Orange case, and the defendants demanded that the government contribute to that settlement, the government’s lead attorney on the case responded as follows: “The United States declines to attend or participate in settlement negotiations or court settlement of this case because any settlement that calls for contribution by the United States is not warranted. This is the United States’ firm position, and we anticipate no change whatever in any aspect of it” (quoted in Schuck 1986, p. 148). Judge Weinstein described the government’s view as “benign detachment,” characterizing it as “cruel” to veterans.

In fact, there are substantial questions regarding the scientific evidence of causality with regard to Agent Orange’s alleged health effects. Indeed, Judge Weinstein viewed the causal evidence to be insufficient to warrant a judgment for the plaintiffs in the Agent Orange cases he handled. Schuck (1986) provides an excellent and detailed discussion of the Agent Orange case and Judge Weinstein’s views regarding causality. Thus, it may well be that government officials were correct in denying any liability, given the lack of scientific evidence regarding harms actually caused by Agent Orange. If this is the case, the producers of the product should also have been free of liability, but those companies were manipulated by Judge Weinstein into a $180 million settlement. Defendants in the Agent Orange Case also incurred large legal fees. The costs of simply preparing for trial were estimated to be in the $100 million range (Schuck 1986, p. 5).

Without much doubt, the U.S. government has to be considered as the proximate cause of any harm that can legitimately be attributed to Agent Orange. After all, (1) the government’s agents had been developing and testing herbicides since World War II and had actually developed one of the two types of herbicides used in Agent Orange; (2) the government had contracted for the production of the product, drawing upon the Defense Production Act to compel the firms to supply it; and (3) the government had been told of potential health harms by numerous sources, including Agent Orange producers, and had still directed the application of the herbicide by inexperienced personnel who had not been warned of potential harms. Indeed, assuming the alleged harms are valid, because the government is immune from prosecution for such harms, particularly in the case of military activity, those government officials who had knowledge of such harms had little incentive to warn the personnel or train them in ways that might mitigate some of the danger. The fact is, of course, that the use of defoliants may well have saved many Vietnam service personnel from harm and/or death in combat. Thus, subjecting some people to the alleged dangers of handling Agent Orange might have been justified on some sort of cost-benefit grounds, but assuming that some of the alleged harms are valid, then by failing to warn those handling the product or those exposed to it, and by failing to train those personnel in safety procedures, the costs of using it might be substantially higher than they had to be.

Agent Orange might appear to be a unique case. After all, it was used in a military context, and only the government under­takes such activities on a wide scale. What about other toxic tort problems? While the government may appear to have little or no direct causal function in some cases of toxic harms, the fact is that the government has been a primary using agent in many alleged toxic problems beyond Agent Orange, and as with Agent Orange, the government frequently denies all liability.[E] For instance, as Chen (1984, p. 26) notes, “Even though the vast majority of asbestos victims worked in government shipyards, the United States Government continues to reject any suggestion that it bears a moral, if not a legal, obligation to the victims.”[F] Millions of tons of asbestos were used to insulate ships built in naval shipyards, and the way it was applied exposed millions of workers to potentially dangerous levels of asbestos, as compared to the relatively safe way that asbestos insulation was applied in the construction of buildings.

Extending Immunity: The Government Contractor Defense

When victims of toxic harms cannot sue the proximate cause, the government, they are forced to sue a more remote cause. Traditionally, more remote causes were not likely to be liable under tort action, but as explained below, tort law has changed dramatically over the last three decades. In the context of this changing tort law, the U.S. 5th Circuit Court of Appeals ruled that a manufacturer of asbestos had a duty to warn anyone likely to come in contact with its products of the fact that asbestos posed a health risk, and therefore that the company was liable for damages to an insulation worker who had been working in a government shipyard (Borel v. Fiberboard Paper Products Corp., 473 F. 2d 1076 [5th Cir. 1973], cert. denied, 419 U.S. 839 [1974]).

An explosion of asbestos suits followed, as discussed in some detail below, filed against manufacturers and suppliers as “third parties” rather than as employers (Chen 1984, p. 26). However, the immunity that government officials enjoy is being extended to some private firms, in the form of the government contractor defense.[1] This defense is developing in ways that may well shield many companies supplying toxic products to the government (Hensinger 1990; Seifert 1989). In Boyle (108 S. Ct. at 2518),[2] the U.S. Supreme Court considered this defense in order to resolve conflicting interpretations that had been developing, and stated: “Liability for design defects in military equipment cannot be imposed, pursuant to state law, when: (1) the United States approved reasonably precise specifications; (2) the equipment conformed to those specifications; and (3) the supplier warned the United States about the dangers in the use of the equipment that were known to the supplier but not to the United States.”

The Boyle decision left open the issue of whether or not the product must have been manufactured for the military under a government contract, and the issue of whether or not the defense can be raised when a product meets government specifications under government contracts but has also been supplied to nongovernment entities (Seifert 1989, p. 204; Hensinger 1990, p. 373).[3] Therefore, the issue of toxic torts and the government contractor defense is far from clear. Prior to Boyle, the government contractor defense had been raised in regard to Agent Orange, and the judges involved indicated that the defense may have been valid, but a pretrial settlement prevented a full test.

The defense has also been raised in some asbestos suits, but with only a minimal amount of success.[4] However, where the courts have rejected the defense, they have relied on lines of reasoning that apparently have been altered by Boyle (Seifert 1989, pp. 202–4). Indeed, there are strong arguments for application of the defense in asbestos cases (Seifert 1989, pp. 205–6).[5] If this is the case, government suppliers will, like government decision makers, have stronger incentives to ignore the potential consequences of not informing others about the hazards they face, as long as they inform the government, further increasing the potential for exposure to toxins used by the government. Thus, the costs of health damages and/or deaths may rise (although perhaps the costs associated with toxic tort litigation will fall as allegedly injured parties find no one to sue).

The potential implications of an expanding government contractor defense are illustrated by the class action suit against NLO, Inc., the owners of a uranium processing plant in Fernald, Ohio. The plant is charged with emitting thousands of pounds of uranium dust into the air, discharging waste into a nearby river, and storing materials from the World War II Manhattan Atomic Project in leaking concrete silos. NLO was under contract with the Department of Energy (DOE), and DOE officials have revealed that the government knew of the problems for decades, and that the problems actually “stemmed from the government’s capital investment and policy decisions” (Hensinger 1990, p. 376).[6] These officials also admitted that it was a government decision “not to spend money to stop the pollution or tell the public about it” (Sherman 1988, p. 3). This admission by DOE officials was an attempt to protect NLO from liability under the government contractor defense, apparently in order to “encourage participation in the risky nuclear industry and to allow for the failure to implement health and safety measures” (Hensinger 1990, p. 376; see also Sherman 1988). The U. S. District Court for the Southern District of Ohio denied the motion by the government to summarily dismiss the suit under the government contractor defense, but the defense may still prevail in court or upon appeal.

Clearly, the liability rules that are applied by the courts influence the amount of toxic tort litigation. If it is clear that a firm will not be liable (e.g., if the government contractor defense is clearly established), then the number of suits filed will fall. If it is clear that a firm will always be liable (e.g., strict liability), then many claims might be filed, although some observers predict that most will be settled without litigation. If the liability rules are not clear, perhaps because they are changing very rapidly, or because they vary across common-law jurisdictions, then litigation costs are likely to be quite high.

Changing and Varying Liability Rules and the “Rush for Property Rights”

Epstein (1980, p. 254) noted that in tort law matters (as well as in property and contract matters), law performs its essential function best only if it remains predictable: “Social dynamism... is wholly desirable, but not best implemented by Judicial decision....[P]rivate sources...should be spared the burden of planning their affairs in an environment filled with unwanted legal uncertainties.” Leoni (1961, p. 17) explained the negative externalities of frequent changes in law well when he noted that legislation “may have and actually has in many cases today a negative effect on the very efficacy of the rules and on the homogeneity of the feelings and convictions already prevailing in a given society.... [T]he fact that the very possibility of nullifying agreements and conventions through supervening legislation tends in the long run to induce people to fail to rely on any existing conventions or to keep any accepted agreements.” But this insight is not a recent one. For instance, James Madison (1937, pp. 289–98) wrote: “The sober people of America are weary of the fluctuating policy which has directed the public councils. They have seen with regret and indignation that sudden changes and legislative inferences...become...snares to the more industrious and less informed part of the community. They have seen, too, that one legislative inference is but the first link of a long chain of repetitions.”

The separation of powers between the executive, judicial, and legislative branches was motivated, at least in part, by this concern, but government judges also produce “legislative externalities.” For instance, Leoni (1961, pp. 23–24), despite his strong support for court-created law as opposed to legislation, noted that judicial law may acquire the characteristics of legislation, including all its undesirable ones, whenever judges have the discretion to decide “ultimately” on a case. In particular, when “supreme courts” are established, the members of these courts can impose law on all citizens concerned. Thus, according to Leoni, establishment of a supreme court actually introduces the legislative process into the judiciary. However, any government court is in a sense “supreme” if its rulings are backed by coercive power and are not overturned by a higher court. Thus, the tendency for “legal pollution” arises whether legislation comes from a legislature or from a public court. Indeed, as Neely (1982, p. 110) reported: “the mass of precedent in law is so enormous that nothing is open-and-shut once it hits the courts.”

Up until around 30 years ago, liability rules in torts were generally similar across common-law jurisdictions, and correctly perceived by manufacturers to imply that they were not liable for toxic harms, at least to workers who were employed by them or by others who used their products. However, over the last three decades, there have been frequent and dramatic changes in tort law. Further, these changes have not been consistently adopted across common-law jurisdictions. The result is a good deal of uncertainty as to what the liability rules are. This uncertainty has made many manufacturers vulnerable to tort actions. The normative issue of whether these changes are justified or not is not an issue addressed here.[7] Rather, the point that will be emphasized is a positive one: when the government fails to provide clear and stable guidelines as to what property and liability rules are (e.g., due to frequent changes in property rights assignments and liability rules), individuals who feel they may be able to lay claim to insecure property rights, and capture the resulting rents, have incentives to invest in such an effort.

Changes and Conflicting Standards in Tort Law.[8]

Three key elements generally distinguish tort actions: (1) duty is owed to the plaintiff by the defendant, (2) harm or damages have been suffered by the plaintiff, and (3) breach of duty is the immediate or proximate cause of the harm (e.g., see Schuck 1986, p. 27; and Cooter and Ulen 1988, pp. 327–34). The lack of any of these elements used to mean that there were no grounds for a tort action, but this has been changing rapidly over the last three decades.

Consider the duty owed by a manufacturer. Under common law, manufacturers used to owe a duty of care only to those who purchased a product from the manufacturer. However, beginning with MacPherson v. Buick Motor Co. (217 N.Y. 382, 111 N.E. 1050 [1916]), this duty gradually expanded to include those who purchase from others in the distribution chain (e.g., retailers). Then a 1960 Supreme Court of New Jersey decision (Henningsen v. Bloomfield Motors, Inc., 32 N.J. 358, 161 A. 2d 69 [1960]) extended the manufacturer’s duty beyond the purchasers of the product to include members of the purchaser’s family and any other people who were likely to use or be exposed to the product. Some courts have continued to expand the manufacturer’s duty along these lines, so the scope of a manufacturer’s legal duty is now substantially larger than it was prior to 1960.

Further, there has also been a movement away from the idea of negligence or fault as the standard of liability (e.g., a breach of duty for care), toward a standard of liability without fault, or strict liability. This trend is particularly strong in the area of product liability, including toxic torts.[9] In many jurisdictions today, a producer can be held liable for causing harm regardless of whether he breached a legal duty to the plaintiff. No fault or negligence is required. When this legal doctrine of strict liability is combined with the ever widening sphere of potential plaintiffs, the result is a very substantial change in liability rules over a relatively short period of time. Clearly, the property rights to income generated by producers are much less secure than they used to be, as a result of their increasing vulnerability to tort action. But these are only some of the relevant changes in tort law.

Similar changes are occurring in the area of damages, where a successful tort action used to lead to compensatory damages paid to the plaintiff for traditional, and therefore predictable, categories of measurable harms. Before the late 1960s, jury awards for damages rarely exceeded $1 million, and punitive damages were very uncommon, generally arising only in cases of “malicious or outrageous wrongdoing” (Schuck 1986, p. 31). Beginning with the 1968 California decision in Dillon v. Legg (68 Cal. 2d 728, 441 P. 2d 912 [1968]), however, courts began to allow plaintiffs to recover for emotional distress. The courts have rapidly added to the list of intangible harms warranting compensation, and today they are more than willing to award damages for difficult-to-measure emotional harms in an ever widening set of circumstances. But what are the appropriate damages for distress or a potential future health problem, or some other kind of intangible harm? As the courts have become willing to consider more and more intangible kinds of harms, the determination of damages has become much more subjective and uncertain. Not surprisingly, damage awards have also grown dramatically. Compensatory damage awards are regularly well above the $1 million level now.

The consideration of unmeasurable “harms” is particularly pronounced in some common-law jurisdictions’ decisions in the area of toxic torts. Indeed, plaintiffs in toxic tort cases are frequently allowed to collect claims before they have contracted any disease (Brenner 1989, p. 795). There are at least two different grounds for such suits. One is distress: “it is an increasing trend for the courts to award damages for fear of future illness in toxic tort cases” (Pope and Del Giorno 1991, p. 495). These cases of distress refer to “cancerphobia,” or “fear of cancer.” In general, as such awards began to appear, the courts required that (1) this fear arises as a consequence of some physical injury, or (2) the plaintiff proves that an exposure in a “zone of danger” occurred and that even though the exposure did not induce a physical injury, the emotional trauma did induce a physical injury. These requirements presumably served as a safeguard against false claims; however, as such damages awards have developed, different jurisdictions have adopted different standards. Pope and Del Giorno (1991, p. 495) suggested that a “dwindling majority” of courts still demand evidence of some physical manifestation of harm,[10] but that other courts have completely abandoned such requirements. In a growing number of cases, all that has been required for recovery of compensatory and even punitive damages is evidence of exposure to toxic risk and a “present reasonable fear of cancer” (Pope and Del Giorno 1991, p. 498).[11]

A second basis for suing prior to contracting a disease arose with the New Jersey Supreme Court decision in Ayers v. Jackson Township (106 N.J. 557, 525 A. 2d 287 [N.J. 1987]). Following the lead in Ayers, courts have rapidly adopted a policy of allowing recovery of the expenses for medical testing and monitoring to detect symptoms of exposure-related harms before any evidence of such harm exists.[12] Some courts have refused to allow such claims, however, so there is a good deal of uncertainty regarding what a firm may actually be liable for in this area.[13] Indeed, Pope and Del Giorno (1991, p. 503) concluded:

The primary trend emerging from the decisions considering whether to allow compensation for non-traditional damages in toxic torts is inconsistency. While many courts have held steadfastly to traditional tort principles, others have felt compelled to fashion new standards.... Rationalizing that in a “toxic age” traditional forms of recovery are inadequate to compensate plaintiffs fairly, these courts are allowing recovery in many instances for mere exposure to a toxin and nothing more.

While these holdings may appear to be progressive and compassionate, in reality they threaten to contaminate toxic tort litigation with frivolous and feigned claims. Allowing recovery for these claims may provide windfalls for plaintiffs who may never be actually injured, thereby depleting resources for those with actual damages from toxic exposure.

In addition to the trend toward awarding damages for intangible harms such as fear of disease and, indeed, simply for toxic exposure, there is a growing trend toward additional punitive or exemplary damages exceeding the losses of the plaintiff for which compensation is granted, particularly when the defendant is a business. When first introduced, punitive damages generally were intended to apply only for intentional torts, but such awards are rapidly being extended to other torts. Now punitive damages can apply “when nothing more malicious or reckless on the manufacturer’s part [is] shown than a calculated, conventional decision to design a product in a way that traded safety off against cost and other marketing and engineering considerations” (Schuck 1986, p. 32).

Punitive damages are not unlike damages awards for intangible losses in that there are no clear standards for determining such awards. Further, like awards for intangible losses, and like strict liability rules, the magnitude of punitive damages awards has been growing to the level where some observers suggest that they could disrupt and fundamentally alter the conduct of business in the United States. In some jurisdictions, a firm can even be punished when no significant harm has been demonstrated. For instance, in Kemner v. Monsanto (No. 80-L-970 [Cir. Ct., St. Clair City, Ill. 1987]), a jury found no credible evidence of physical harm to the plaintiffs, so they returned a verdict of $1 in compensation, but they then awarded $16 million in punitive damages (Huber 1992, p. 728).

Punitive damages can be even more devastating in toxic torts than in other torts, because toxic torts generally involve large numbers of separate and independent cases in several different jurisdictions. Thus, punitive damages can be assessed over and over again against a single firm for a single alleged wrong. Indeed, toxic tort defendants have raised constitutional objections to repetitive punitive damages, but to no avail. For instance, in Juzwin v. Amtorg Trading Corp. (705 F. Supp. 1053 [D.N.J. 1989]), the federal district court of New Jersey held that the imposition of multiple punitive damages violated the due-process clause of the Fourteenth Amendment, and therefore concluded that the defendant was relieved of further liability for such awards. However, in a rehearing (718 F. Supp. 1233 [D.N.J. 1989], vacating, 705 F. Supp. 1053 [D.N.J. 1989]), the court changed its order, concluding that it was powerless to shape a remedy to this problem, and that it would be unfair to plaintiffs to implement such a ruling retroactively.

Thus, the repetitive assessment of punitive damages was permitted despite the violation of due-process rights (Lafferty 1991, pp. 648, 655). This decision was the first to recognize that multiple assessments of punitive damages violated the due-process clause, however, and as with so many other issues in toxic torts, other jurisdictions have come to very different conclusions. The same due-process arguments were rejected in Man v. Raymark Industries (728 F. Supp. 1461 [D. Haw. 1989]), for example, and the Kansas Supreme Court viewed the defendant’s actions in Tetuan v. A. H. Robins Co. (241 Kan. 441, 738 P. 2d 1210 [1987]) to be a series of different wrongs rather than a single wrong, in order to avoid the defendant’s constitutional claims.

So as the potential number of plaintiffs has grown, and the harms (and nonharms) that a firm can be held liable for have multiplied (e.g., through the doctrine of strict liability), the potential size of damages awards has also increased. Not only are the property rights to income generated by producers substantially less secure than they used to be, but in each tort action, a larger portion of that income now may be vulnerable. And still more changes in tort law have occurred with regard to the causality element.

Historically, establishing that the defendant’s action was a “cause-in-fact” of the plaintiff’s harm was a necessary but not a sufficient condition for the plaintiff to recover damages. An action was considered to have been the cause-in-fact of a harm if the harm would not have occurred “but for” the action. Besides cause-in-fact, there was another traditional causal requirement in most court suits. As a condition of recovering damages, it used to be that a defendant’s breach of duty also had to be the proximate cause. But the idea of remoteness, and therefore of proximity, is a relative one. How close must the connection be in order for it to be considered proximate? The courts have not provided any hard and fast rule on this question either, as suggested above. Indeed, Henningsen v. Bloomfield Motors and subsequent decisions have allowed producers to be held liable as increasingly remote causes. Thus, when the true proximate cause is immune from liability (e.g., as the government may be, or as an employer may be under workers’ compensation), these changes in tort law suggest that the income of more remote causes may be vulnerable.

Even more significantly, cause-in-fact no longer must be supported by a preponderance of evidence. The courts now consider evidence that the defendant’s product might be a substantial factor in producing the harm as sufficient in many cases. In Jackson v. Johns-Manville Corp. (727 F. 2d 506, 516 [5th Cir. 1984], cert. denied, 106 S. Ct. 3339 [1985]), for instance, it was stated that the preponderance rule “provides an ‘all or nothing’ approach, whereby the plaintiff becomes entitled to full compensation for those...damages that are proven to be ‘probable’ (a greater than fifty percent chance) but is not entitled to any compensation if the proof does not establish a greater than fifty percent chance.” However, the courts are divided as to the treatment of this “all or nothing” approach between “strong” and “weak” versions of the preponderance requirement (Brenner 1989, p. 789). The courts increasingly are willing to accept statistical, epidemiological, or experimental evidence to establish causation rather than the much more particularistic evidence that used to be required. But under the strong version of the rule, statistical correlation indicating that the probability exceeds 50 percent is not sufficient proof—some particularistic proof of direct and actual knowledge of the causal relation is required (Namm v. Charles E. Frost & Co., 178 N.J. Sper. 19, 427 A. 2d 1121, 1125 [App. Div. 1981]).

The weak version of the rule allows a verdict in favor of the plaintiff based solely on statistical probability (In re Agent Orange Product Liability Litigation, 597 F. Supp. 740, 835 [E.D.N.Y. 1984]). The statistical, epidemiological, or experimental evidence clearly does not have to be very strong either, at least by any scientific standards. For instance, in affirming the lower-court verdict awarding $5.1 million for congenital injuries allegedly from a spermicide in Wells v. Ortho Pharmaceutical Corporation, the court of appeals stated that “it does not matter in terms of deciding the case that the medical community might require more research and evidence before conclusively resolving the question” (615 F. Supp. 262, 266–67 [N.D. Ga. 1985], aff’d, 788 F.2d 741 [11th Cir. 1986], at 745). Yet, the study upon which this decision was based explicitly stated that the results were tentative, and in fact, subsequent research has failed to support the findings (Huber 1992, pp. 724–25). Indeed, substantial, and perhaps overwhelming, evidence now suggests that spermicides are not teratogenic. Numerous other examples can be cited, including Agent Orange as noted above, leading some observers to characterize the tentative scientific evidence being brought to bear, often by “hired guns” who make much of their income by testifying as “experts” in tort cases, as “junk science” (Huber 1992, pp. 724–37; Spyridon 1991, pp. 298–313).

Finally, in cases where general causation can be established but the precise defendant who caused the harm cannot be identified, the courts have begun to adopt weaker standards of proof to facilitate plaintiffs’ causes. For instance, if a group of defendants can be identified whose fungible product was the cause of alleged harm, then in some jurisdictions, damages can be apportioned among the group. Consider the case of DES, a drug prescribed by doctors between 1941 and 1971 to prevent miscarriages in expectant mothers. In the late 1960s, it was discovered that this drug apparently caused cancer in women whose mothers had taken DES. Over 200 companies had produced and sold the drug, so the plaintiffs could not prove which companies had produced the DES that their mothers had taken years earlier. In a 1980 decision, the California Supreme Court ruled that when there are innocent plaintiffs and negligent defendants and when the defendants are better able to bear the costs from the accident than the plaintiffs, the plaintiffs should be able to recover even if they cannot identify who actually caused the harm (Sindell v. Abbott Laboratories, 26 Cal. 3d 588, 607 P. 2d 924 [1980]). Therefore, the court proposed that the lower court assign liability among the defendants in proportion to the companies’ market shares in the production and sale of DES at the time that a plaintiff’s mother took the drug.

Other courts have not been willing to go as far as Sindell. For instance, in Namm v. Charles E. Frost & Co., the court held that adopting the Sindell theory of enterprise liability would “result in total abandonment of the well settled principle that manufacturers are only responsible for damages caused by a defective product upon proof that the product was defective and that the defect arose while the product was in the control of the defendant.” Yet another version of the market-share theory was adopted in Payton v. Abbott Labs (386 Mass. 540, 437 N.E. 2d 171 [1982]), where the court was willing to use market shares, but only as long as each defendant is held liable for the amount of damage caused to the total population injured by the product. A few other states have also adopted modified versions of the enterpriseliability, or market-share, theory.[14] Whether others will follow suit is not certain.

While many of the changes in tort law outlined above, such as those arising in Sindell, may sound quite “fair,” they clearly have opened up more avenues for pursuing damages and created stronger incentives to file court cases.[15] These changes have created incentives that have led to an explosion in some types of tort litigations (e.g., toxic torts, medical malpractice), increasing the costs of administering the tort system, including court crowding and delay, and much higher legal fees.

Incentive Consequences of Changes in Tort Law

As Barzel (1989, p. 64) emphasized, a typical asset is not a homogeneous entity whose single attribute is owned either by an individual or in common. An asset can have many attributes, and property rights to all of an asset’s different attributes are never perfectly defined. The bundle of rights associated with a particular good or service can include some rights that assign benefits to particular individuals, while still other potential benefits are held in common. Further, incentives always exist to capture the rents that are generated by attributes held in common. Rents are dissipated through competition as the commons becomes crowded and overused (e.g., see Johnson and Libecap 1982).[16]

Because of changes in tort law, property rights to income generated by many producers are no longer exclusive. The resulting uncertainty about property rights to producers’ income has the effect of transferring the property rights to the use of income generated by productive efforts from the producer to the commons. And as Cheung (1974, p. 58) explained, “When the right to receive income is partly or fully taken away...the diverted income will tend to be dissipated unless the right to it is exclusively assigned to another individual.” In the narrow context of toxic torts, this creates two important incentives.[17]

First, the property rights to producers’ income are valuable, and because of the uncertainty created by rapidly changing tort law, they are also “up for grabs” (as in Anderson and Hill 1990, p. 177) for anyone who can establish a claim to them. Thus, individuals have incentives to rush in quickly to establish claims to rights to the income of alleged mass tortfeasors. Making such a claim in tort law is not unlike making a claim to oil from federal lands (Libecap 1984), or to shrimp in the Texas Gulf fishery (Johnson and Libecap 1982), or to the public lands as they were privatized (Anderson and Hill 1990). For instance, Libecap (1984, p. 383) explained that property rights to oil on federal land were assigned only upon extraction during the early years of this century, and as a result, “[e]xcessive wells were dug along property lines to drain oil from neighboring areas; extracted oil was placed in surface storage (open reservoirs as well as tanks), where it was subject to evaporation, fire, and spoilage; and rapid extraction rates reduced total oil recovery as subsurface pressures, necessary for naturally expelling subsurface oil, were prematurely depleted.”

Similarly, Anderson and Hill (1990, p. 195) found that “[e]fforts to give away the public domain created a commons into which squatters and homesteaders rushed to compete for the rents. In the process, pioneers paid for the land in terms of forgone wealth, privations, and hardships, demonstrating that ‘there ain’t no such thing as free land.’” Tort claims also require a substantial investment in time and resources (attorneys, expert witnesses, etc.) in order to meet the requirements of the courts in supporting a claim. The implication of this race for property rights and the resulting rent (or nonexclusive income) dissipation is that tort plaintiffs are likely to pay dearly for any income they actually capture. Paraphrasing Anderson and Hill, the effort to give income to those who claim to be suffering from toxic torts should create a commons into which legitimate and illegitimate plaintiffs (homesteaders and squatters) will rush, and therefore, plaintiffs in general will pay very high costs in the form of legal fees, time invested in litigation, anxiety, etc.—there “ain’t no such thing as free relief from toxic harms” either.

Second, the producers who face the dissipation of what used to be their exclusive income have incentives to compete to retain that income and to reestablish claims to it. They also will bear high costs as they invest along every margin that may appear to be beneficial in delaying losses or regaining rights (e.g., employing active and innovative defenses in tort litigation, influencing legislators in an effort to redirect the common-law courts, and using means of limiting liability that are available within the law, such as reorganization under Chapter 11 bankruptcy). Thus, rents will be dissipated along several margins, as in Cheung (1970); Libecap (1984); Johnson and Libecap (1982); and Eggertsson (1990, chapter 4).

An Example: Asbestos

In the late 1940s, liability rules and regulations that asbestos producers faced were quite clear. First, there was virtually no liability for harms that their own workers might incur, because these workers were covered by workers’ compensation.[18] For instance, the Johns-Manville pipe plant in Ontario, Canada, would bear only about 1.27 percent of the cost of its workers’ claims, because workers’ compensation pools such risks (Dewees 1986, p. 309). In the United States, the expected costs of worker injuries were even lower, because few asbestosrelated workers’ compensation claims ever succeeded (Epstein 1982, p. 18; Dewees 1986, p. 309). Even as this changed, prior to 1970, claims alleging asbestosrelated injuries were mainly confined to workers’ compensation.

Further, before the changes in the 1960s, there was no discernible tort liability risk for asbestos producers acting as suppliers (Epstein 1982, p. 18). Tort law would compensate only for injuries to the actual purchasers in the distribution chain, so employees of purchasers could not make claims against the supplier (they were presumably insured under workers’ compensation too). The incentives of asbestos producers to actively warn employees and end users of potential harms were not unlike the incentives that public officials immune from tort action face today. Thus, it might be expected that relatively high levels of exposure occurred because of the lack of such warnings. In fact, however, a good deal of information about many of the potential health consequences of asbestos exposure was readily available. Papers on asbestosrelated health problems began appearing in leading medical journals in 1924 (Castleman 1984, pp. 6–7).

Castleman (1984) provides a detailed chronology of the publication of asbestos-related medical research. Among other things, he concluded that “asbestosis was by 1935 widely recognized as a mortal threat affecting a large fraction of those who had regularly worked with the material” (p. 31). Further, government health officials clearly had access to these publications, so they should have been in a position to warn people working with asbestos, including their own shipyard workers. Indeed, it is clear that government officials were aware of potential asbestos risks. Bureau of Labor Statistics (BLS) bulletins recognized asbestosis in the late 1920s, for instance, and the BLS’s journal, the Monthly Labor Review, published articles on asbestosis in the early 1930s (Castleman 1984, pp. 495–96).

Further, the government agency that is responsible for exposing the largest number of people to dangerous levels of asbestos, the U.S. Navy, published documents referring to the dangers of asbestos in shipyards in 1943, 1947, 1960, and 1961, and an article was published by naval consultants and officers in the Journal of Industrial Hygiene and Toxicology in 1946 (Castleman 1984, pp. 503–4). Indeed, the Charleston, South Carolina, naval shipyard began annual screening of employees handling asbestos in 1939, and the navy published a report on “Minimal Requirements for Safety and Industrial Health in Contract Shipyards” in 1943, which included segregation of dusty work, use of exhaust ventilation and respirators, and periodic medical exams of workers handling asbestos; yet such precautions were not mandated, and only some of the shipyards chose to advise the use of respiratory protection (Castleman 1984, p. 166).

Some health effects of asbestos were not confirmed until the mid-1960s (Epstein 1982, p. 18), and some alleged effects are still not confirmed, but the important point is that during the period from which most of the asbestos cases have arisen, what knowledge there was of asbestos health problems was widely disseminated, and there does not seem to be any significant evidence that the asbestos producers had any private knowledge that they withheld from the public at large (Epstein 1982, pp. 19, 43). The relevant information was in the public domain.

Health costs from asbestos may be relatively high as a consequence of the asbestos producers’ lack of liability and incentives to be unconcerned about asbestos harms, assuming that the firms were the low-cost providers of information to potential victims, but given the liability rules in place before 1960, workers were essentially liable for the consequences of not informing themselves. Alternatively, if these workers were not capable of obtaining or understanding the implications of the widely published medical studies of asbestos health problems (e.g., see Dewees 1986, p. 315), then perhaps the government, which established the liability rules and put by far the largest numbers of workers in harm’s way in the naval shipyards, should have warned workers. Whether health costs are relatively high or not, and there are reasons to suspect that they may not be (Dewees 1986), given the liability rules in place before 1960, it is clear that another significant aspect of the cost of toxic torts was relatively low: the cost of litigation.

The asbestos firms had clear reason to believe that they were protected from tort claims, as noted above, but even more significantly, given the issues addressed here, those who were exposed to asbestos had clear reasons to believe that the property rights to asbestos producers’ income were secure. Therefore, they had no incentive to attempt to claim that income through litigation. However, as tort law began to change in the early 1960s, producers’property rights to their income began to become less secure. Incentives to litigate developed, culminating in 1973 with the case of Borel v. Fiberboard Paper Products Corp. (473 F. 2d 1076 [5th Cir. 1973], cert. denied, 419 U.S. 839 [1974]). In this case, a worker maintained a product liability claim against an asbestos manufacturer rather than his employer, and the claim was upheld under the theory of strict liability. As Epstein (1982, p. 43) noted, “This case completely transformed the law.” This sudden and dramatic change in liability made what had been perceived as very secure property rights much less secure. Epstein (1982, p. 44) explained:

The retroactive nature of the duty not only renders the judicial exercise pointless as a matter of deterrence, but also imposes on the firm the impossible task of complying with a liability rule of which it could not have had any knowledge. The standard practices of yesterday have become the source of liability today. Rules, like horses, should not be changed in midstream.[19]

More changes in rules quickly followed. After the Borel decision, large numbers of additional claims were filed, and as these claims have expanded, plaintiffs have taken advantage of virtually all of the changes in tort law discussed above. For instance, the impact of changing causality requirements is clearly present. For one thing, some of the illnesses attributed to asbestos can also be caused by other factors, so in these cases, the medical evidence is inconclusive. Indeed, the risk of some asbestos-related diseases is sharply increased if the victim smokes (Epstein 1984, p. 482). But beyond that, in some court jurisdictions no harm even has to be evident: exposure to asbestos and a probability of future health problems may be enough to generate a favorable ruling due to claims of distress or a need to monitor for potential health effects.

In addition, the source of the asbestos is often not known. The fact is that asbestos is present everywhere in the ambient air, but beyond that, individuals exposed to larger amounts of asbestos due to their job may not know who actually produced the asbestos product used years ago. There were over 200 manufacturers of asbestos products, so workers can rarely demonstrate that one particular supplier was the direct cause of their alleged harm (Chen 1984, p. 26). Thus, plaintiffs must draw upon the courts’ willingness to apportion damages among groups of potential tortfeasors. Indeed, given that willingness, “the prudent plaintiff will sue every manufacturer that ever supplied any employer for whom he worked over the years” (Epstein 1982, p. 45). So suits against multiple defendants are filed, claiming that there is a probability that each was a causal agent.

Perhaps the most significant change in tort rules of causation, from the perspective of the topic at hand, is that the agent that is actually the immediate or proximate cause of heavy exposure to asbestos in many of the cases is a governmental unit or contractor: the naval shipyards, or perhaps a public school district. But the federal government has refused to admit any liability and has effectively declared itself immune from prosecution.[20] Similarly, local school districts claim that they are not liable. In fact, school districts are now suing manufacturers in order to obtain payments to cover costs of ridding the schools of asbestos and replacing it with some other form of insulation.[21] At any rate, given government immunity and workers’ compensation limitations of suing employers, plaintiffs must seek damages from more remote causes.[22] This has generally been the manufacturer.

Not all of the changes in tort law are accepted by all courts, of course. As Epstein (1982, p. 44) noted, the tort system’s treatment of asbestos is “haphazard”: the same evidence can lead to complete exoneration in one court and punitive damages in another.[23] But it is this uncertainty that is actually at the heart of the litigation explosion. If property rights were clearly defined, there would be much less reason to litigate. When they are not clearly defined, the incentive is to try to lay claim to any that are insecure. As Huber (1992, p. 731) noted, “To a tort lawyer, a single million-dollar verdict that survives all appeals can more than offset a long string of losses.”

The Race for Rents

A 1985 Rand Corporation study (Hensler et al. 1985) put the number of asbestos tort cases in the United States at something over 30,000 as of 1984, but filings continued to be added at an increasing rate every year. Indeed, lawsuits are likely to continue to be filed as long as nonexclusive income is perceived to be available from asbestos producers. For instance, prior to 1983, nearly all of the personal-injury suits filed against asbestos firms were by shipyard workers and miners, but that year, more than 60 plasterers who had worked on buildings insulated by asbestos filed lawsuits (Chen 1984, p. 30), suggesting to a whole new set of potential plaintiffs that they might be able to lay claim to the nonexclusive income of former asbestos producers.

Similarly, a new area of asbestos litigation, known as “rip-out-and-replacement” cases, began in 1982 (Chen 1984, p. 30). In these cases, asbestos suppliers and manufacturers are being sued for the cost of replacing material that contains asbestos (initially only schools were involved, but others soon followed). The “tidal wave” of asbestos suits predicted by Chen (1984, p. 32) has come. In 1992, the president of Keene Corporation reported that there were more than 85,000 cases filed against his firm alone, with an additional 2,000 filings every month, and that they had already settled 75,000 cases (Bailey 1992, p. 1). These cases all have multiple defendants, so he estimated the total number of cases actually pending for the industry to be 150,000.

Estimates are that perhaps 11 to 20 million Americans could ultimately suffer some health costs due to asbestos exposure, and that deaths linked to asbestos exposure could reach the 150,000 to 450,000 range before it is all over (Dewees 1986, p. 289; Chen 1984, p. 26; Rubin 1986, p. 430). There are so many untenable claims being put out about asbestos, however, that there is no way to judge how accurate such estimates might be (in 1980, for instance, while introducing his asbestos health hazard compensation bill, Senator Gary Hart claimed that one and a half million Americans exposed to asbestos since World War II were expected to die from asbestos diseases [Brodeur 1985, p. 259]—a claim that is clearly well outside the range supported by widely held scientific estimates).[24] Hundreds of thousands or even millions of additional claims are possible, partly because many claims are not valid, as explained below. Chen (1984) described asbestos litigation as a “growth industry,” but a more appropriate description would be as a race for rents.

Rent Dissipation

Of those 30,000-plus claims as of the time of the 1985 Rand study, only about 4,000 had received any compensation (Hensler et al. 1985). But significantly, the legal fees were running at about three times the level of compensation payments. The Rand study reported that asbestos plaintiffs had received about $400 million but had netted $236 million in compensation because the plaintiffs’ lawyers had been paid around $164 million, or 41 percent of the payments to victims. And defense lawyers had earned over $600 million at the time, including about $205 million in cases that resulted in payments to plaintiffs and $395 million to fight claims from plaintiffs who got nothing. So of the $1 billion that had changed hands, over 75 percent had gone to lawyers.[25] Further, this percentage breakdown has persisted. A 1992 estimate was that asbestos litigation costs had reached $12 billion, with $9 billion going to legal fees (Bailey 1992, p. 2). As Bailey noted, estimates of future costs range up to $100 billion, depending on who is doing the estimating. Thus, as predicted above, the race for property rights is involving very high costs for the competitors.

The average asbestos suit names at least 20 defendants, who share payment of the damages awarded (Chen 1984, p. 26). Thus, for instance, Keene Corporation was involved in 85,000 of the 150,000 pending asbestos cases in 1992.[26] These multidefendant cases are one reason for the huge amount of money being paid to defense attorneys, of course. Typically, a defendant has to hire attorneys in every jurisdiction in which it is sued. Some of the major defendants have hired “regional counsel”—lawyers who have acquired considerable expertise in asbestos cases and now work full time supervising and advising a team of lawyers responsible for defense in the large number of cases that the company is involved in (Chen 1984, p. 26). Johns-Manville, one of the largest asbestos manufacturers, employed 60 different law firms around the country before declaring bankruptcy in 1982.

Plaintiffs’ lawyers are also reaping huge rewards. They generally work on a contingency fee basis, taking from a third to a half of the award received by a client. Asbestos awards have included high punitive damages as well as compensatory damages for intangible harms. In fact, 25 percent of all the punitive-damages awards ordered by the courts since 1965 have been in asbestos cases (Bailey 1992, p. 3). This makes the awards larger, of course, and therefore the lawyers’ contingency fees are larger. The high awards that lawyers can share in have encouraged personal-injury lawyers to go out and actively recruit plaintiffs, many of whom have little or no discernible asbestos-related illness (Chen 1984, p. 26).

Several lawyers have specialized in the asbestos tort business, flying around the country helping local attorneys pursue thousands of claims. One Los Angeles attorney was involved in 4,000 asbestos cases in California alone in 1984, basically supervising a team of attorneys that actually handled each case, but his stake was 30 percent of the awards (Chen 1984, p. 26). Another lawyer got a $4 million contingency fee in 1982 from settling one case involving 141 plaintiffs; this certainly seemed like a very high fee, but a recent settlement netted two lawyers $125 million, or about $1 million a day for the time they spent on the case (Bailey 1992, p. 3). This is somewhat of an outlier, but Bailey (1992 p. 2) estimated that the returns for successful plaintiffs’ lawyers from contingency fees in asbestos cases average over $5,000 per hour of work actually done on the cases. In fact, this is another reason for the high defense fees. Since attorneys reap relatively large fees in these cases, and can obtain multiple fees by representing multiple clients, there are strong incentives to lead the rush for property rights.[27] Asbestos firms are forced to defend themselves on an ever increasing number of fronts.

The large numbers of multiple filings apparently include many meritless or at least premature claims. As noted earlier, as of 1984, almost two-thirds of the payments to defense attorneys had gone toward cases in which the plaintiff did not recover damages. But as some courts have become willing to allow awards for such things as fear of disease when no actual physical manifestation exists, the potential for successful pursuit of premature or illegitimate claims has increased. The race for property rights and the likelihood of depletion of defendants’ financial capabilities to pay (or of Chapter 11 bankruptcy) encourage plaintiffs to get into the race as early as they possibly can, so the increased willingness of courts to grant damages prior to actual physical manifestations of exposure encourages more claims. The result is like Libecap’s (1984, p. 383) findings that premature extraction of oil from federal fields prematurely depletes subsurface pressures and reduces total oil recovery, and Anderson and Hill’s (1990) analysis of premature production on homesteaded lands.

Plaintiffs with premature or illegitimate claims are also being attracted into the litigation race for property rights because the courts, overwhelmed by asbestos cases, have begun to consolidate claims in an effort to encourage mass settlements. These are nonconsensual consolidations (Bailey 1992, p. 3); that is, the defendants and plaintiffs do not have to agree to the consolidation. Defendants object strongly because under mass settlements or consolidated trials, it is relatively easy for illegitimate claims to get lumped in with legitimate claims. The combined evidence of the legitimate claims can overwhelm a jury with evidence that would not have been admissible in some single-plaintiff’s case: weak or illegitimate claims are able to free ride on strong claims and share in the punitive-damages and intangible-harm awards.

Efforts to Defend Insecure Property Rights

The ongoing defensive effort in tort cases (and accompanying huge legal fees for defense attorneys) is but one margin that asbestos producers have explored as they try to preserve their vulnerable income. For instance, asbestos producers filed various lawsuits against the government, seeking indemnification by the government because (1) the navy had failed to institute appropriate precautionary measures for handling asbestos in ship-yards, or (2) the government had failed to maintain a safe work-place for shipyard employees and was, therefore, the primary cause of the alleged harms, or (3) the government was contractually liable for asbestos exposure to shipyard workers (Brodeur 1985, pp. 251–53).[28]

The asbestos firms also have lobbied Congress in an effort to obtain an asbestos health hazards compensation bill. Brodeur (1985, pp. 192, 194–95, 258–62) explained that such a bill was introduced by Representative Millicent Fenwick (whose district included the town of Manville, N.J., where a large Johns-Manville asbestos plant was located) in 1977, and Senator Gary Hart (whose 1980 campaign received contributions from Johns-Manville’s PAC and several of its officers) in 1980 and again in 1981, for example. The bill would have required that compensation for asbestos injuries could be obtained only from the federal or state no-fault workers’ compensation insurance carried by the last employer who exposed a particular worker to asbestos (e.g., the U.S. Navy or a private shipyard owner rather than the manufacturer).

While the bill was claimed to be designed to provide relief to asbestos workers, its opponents labeled it the “Johns-Manville bailout bill” and saw it as an effort to “take away the right of deceased and disabled workers, and the widows and families of workers who had died of asbestos disease, to sue the manufacturer of asbestos...products for negligence and failure to warn about the health hazards of asbestos. Thus, it would have eliminated the right of those workers to be compensated for pain and suffering they had endured as a result of asbestos disease, and would have protected the manufacturers from being judged guilty of outrageous and reckless misconduct, which would justify the awarding of punitive damages.” In other words, the statute would have reestablished the property rights that had been in place before the Borel decision. These efforts have failed, however, at least so far.

Defending Property Rights through Chapter 11 Bankruptcy

Overwhelmed with legal fees and unknown numbers of both legitimate and potentially illegitimate claims, and unable to establish clear liability through statutory change, some companies have taken a new defensive tactic in an effort to regain control of their property rights to income: Chapter 11 bankruptcy. One of the first asbestos firms to do so was Johns-Manville.[29] In 1982, Johns-Manville was spending $1 million a month on asbestos-related legal fees (Chen 1984, p. 30). During the first quarter of that year, its insurance company had paid out $16 million in asbestos claims. On April 1, 1982, the insurance company informed Johns-Manville that it would not pay any more. Johns-Manville had seen its asbestos settlements rise form $300,000 in 1975 to $35 million in 1981, and the 1982 figure reached $27 million in August. As a consequence, the company chose to declare Chapter 11 bankruptcy against the 16,500 lawsuits that were pending and the nearly 500 new ones that were being filed every month. At the time, the company claimed that it was worth about a billion dollars (Chen 1984, p. 30), although others estimate that its value was at least twice that (Brodeur 1985, p. 262).

Under the Bankruptcy Reform Act of 1978, which created Chapter 11 proceedings, the court can estimate the value of claims against a company seeking relief, including all legal obligations “no matter how remote or contingent,” and develop a plan to expedite that relief. Chapter 11 also produces an automatic stay of all pending litigation and blocks payment of all unsecured debts incurred before filing, including interest payments and attorneys’ fees. Johns-Manville proposed to the bankruptcy judge that its nonasbestos operations be reorganized as a new corporate entity that would be free from all asbestos liability, but that it would then contribute $400 million in earnings to a trust fund to pay asbestos victims, with payments based on the evaluation of medical experts. None of the payments from the trust fund would go to plaintiffs’ attorneys, however. The attorneys specializing in asbestos cases naturally opposed this idea, demanding that the fund should have at least $700 million and that attorneys’ fees should be paid. Note that the added $300 million would be roughly 41 percent—the average take that plaintiffs’ lawyers were enjoying at that time. No asbestos victims testified at the bankruptcy hearing, and the head of Asbestos Victims of America accused the lawyers of representing themselves rather than the injured workers (Chen 1984, p. 30).[30]

Neither side’s proposals were accepted by the bankruptcy judge. The bankruptcy case and reorganization took over six years to accomplish, during which no claims were paid. The settlement required Manville (the new name of the company) to establish a trust that would ultimately be able to pay out $2.5 billion to asbestos claimants and another trust to pay schools, hospitals, and businesses that must remove asbestos (Cohen and Bollier 1991, p. 131). The trust was given control of a majority of Manville’s stock. It was to receive $57 million a year from the company for 24 years, beginning in 1991, and if necessary, the trust could also take up to 20 percent of the company’s net earnings, but no more than that. Thus, there is a cap on Manville’s liability. In addition, Manville won the rights for the trust to pay only compensation, not punitive damages, and for a mandatory settlement procedure to be followed before litigation against the trust can be waged. Further, their liability is limited, so they have no obligation to fully pay claims that may eventually materialize. The court also approved payments of $102 million to lawyers, accountants, and investment bankers involved in the bankruptcy proceedings, and chose a single lawyer to represent all future claims against the trust (although, apparently, lawyers for previously existing claimants can take a cut). That lawyer is to receive $4.5 million for this service. So bankruptcy was not cheap for Manville, but it may prove to have been a good move. By 1990, 150,000 claims had been filed against the trust rather than the 100,000 predicted, and the average award was $43,500 rather than the $25,000 predicted (Cohen and Bollier 1991, p. 132). The trust’s commitments to make payments to claims already settled mean that any new settlements will have to wait at least 15 years for a payment. There were $6 billion in outstanding claims at the time.

As of August 1992, 16 asbestos companies had declared Chapter 11 bankruptcy, turning away from the common law of torts to the bankruptcy courts to try to sort out their asbestos liabilities (Bailey 1992, p. 3). Since these firms’ property rights to at least part of their income are now relatively secure, the remaining defendants in the asbestos torts are being forced to pay larger shares of the damage claims. More firms are likely to take the bankruptcy route unless an alternative arises. After all, it has been 20 years since the Borel decision, and there is no end in sight in the race for property rights that the changes in tort law have set in motion. If anything, uncertainty about property rights is increasing. For instance, Worthen (1987, p. 1345) noted that “[p]resently, there are four different theories of asbestos insurer liability as interpreted by five U. S. Courts of Appeal,” and as a result of this uncertainty, insurers are unwilling to write asbestos abatement insurance. Thus, asbestos firms face the most recent wave of lawsuits over asbestos removal with no way to insure against large losses of income through private insurance markets.

The threat of Chapter 11 adds to the incentives of potential plaintiffs and attorneys to rush in and make claims early, of course, before a company can take refuge in Chapter 11 and secure at least part of its future income. But the race for property rights implies that claims will ultimately substantially exceed the ability (or willingness, given the Chapter 11 option) of firms to pay, so the only way that all of the alleged victims can ever expect any compensation is through cooperation and compromise to divide up the potential rents, rather than through adversarial conflict. However, such cooperation is unlikely due to the very nature of the problem that has been created. Eggertsson (1990, p. 264) explained that three problems actually may combine to cause a race for property rights in a common-pool environment: “(1) high exclusion costs; (2) high internal governance costs; and (3) an open access constraint imposed by the state.” In their analysis of rent dissipation in the Texas shrimping industry, Johnson and Libecap (1982) stressed the importance of high internal governance costs (along with an open-access constraint) due to the heterogeneity of fishing skills. They found that heterogeneous fishermen will tend to oppose cooperative agreements that might somehow divide up the common-access resource (e.g., catch quotas) “at least until the fishery is intensively depleted.”

Plaintiffs in asbestos cases are similarly heterogeneous (Kakalik et al. 1984). Some were shipyard workers, some were asbestos-related factory workers, and some were insulation workers; some have clear evidence of asbestos-related health harms (e.g., asbestosis), others have health harms that may be statistically linked to asbestos exposure (e.g., lung cancer), and others have no physical manifestations of harms but claim distress or a need for medical monitoring. Further, plaintiffs are dispersed among a large number of different common-law jurisdictions with conflicting tort liability standards, and therefore have different expectations about ultimate damages payments. And beyond that, plaintiffs’ lawyers, whose interests are substantially different from all of the plaintiffs and who probably differ substantially in skills (much like the shrimp fishermen in Johnson and Libecap 1982), are also involved. Voluntary agreements to settle are highly unlikely under the circumstances.[31]

Conclusions

Even when the government is a direct and proximate causal agent for toxic tort harms, government officials have weak incentives to warn potential victims, either because of general government immunity or because of effective immunity for officials when damages are paid by taxpayers. The government is a major user of allegedly toxic products, such as Agent Orange in military operations and asbestos in shipyards and schools, and a major producer of toxic waste. Indeed, it would appear that the U.S. government is directly responsible for more potential toxic harms than any other one entity in the United States (and perhaps the world, although the communist governments of eastern Europe probably were close competitors).

The government can cause toxic harms in indirect ways as well. For example, legislative mandates such as the Defense Procurement Act, which was used to force production of Agent Orange, can lead to toxic exposure. And the biggest remaining danger from asbestos may arise because of government mandates. Many people feel that the most significant continuing threat of asbestos is in the public schools built prior to around 1970, where, in part due to inadequate maintenance or installation, teachers and children are being subjected to prolonged exposure (Connaughton 1989). In fact, however, when the asbestos has been properly maintained the danger is quite low, so it is not clear how many students and teachers are at risk. A 1983 EPA survey found that 2,600 of the 126,000 schools nationwide actually had asbestos problems (Chen 1984, p. 30). Nonetheless, in the Asbestos Hazard Emergency Response Act of 1986, Congress mandated that schools start removing asbestos-containing materials by July 9, 1989, despite the fact that insurance against harms arising in the process of removal was not available and the report that Congress required to be produced by the Environmental Protection Agency on this insurance problem was not even due until October 1, 1990 (Worthen 1987, pp. 1349–50). Beyond that, the EPA, the American Medical Association, and other health groups have advised against general removal, because the removal process will unnecessarily put many people at risk (Bailey 1992, p. 2).

There are other examples of laws that can lead to greater toxic exposure by influencing the incentives of important actors in the toxic substances arena. Government immunity may be extending to various producers of toxic substances through the government contractor defense, for instance. Indeed, the resulting lack of liability is not unlike what existed three decades ago for most producers, not simply those who sold to the government. Such liability rules provide incentives for firms producing and using a potentially toxic product to be unconcerned about health problems. Another example of such incentives—one that was important 30 years ago, before the toxic tort explosion, and still exists today in many states—is when employees are allowed to recover under the workers’ compensation system as an exclusive remedy and tort actions against employers are prohibited (Dewees 1986, p. 291).[32] Thus, employers shift part of the costs of exposing their employees to toxic substances to other employers who contribute to the workers’ compensation system, and have relatively weak incentives to avoid health risks (the vast majority of toxic torts do not involve employees suing employers, but instead involve manufacturers being sued by individuals somewhere down the distribution chain). Of course, if employees know that they are liable for harms they endure, either fully (as under the government contractor defense) or partially (as under workers’ compensation with less than full compensation), then they have incentives to seek information about potential harms.

It may be that the firms are actually the low-cost providers of such information, suggesting that they should be liable for harms, at least from an efficiency perspective. But even if firms are the low-cost providers of information, it still does not follow that realigning liability rules in tort law will enhance efficiency. The reason is suggested by Anderson and Hill (1990, p. 177) in their discussion of privatization of public lands: “when property rights and the rents therefrom are ‘up for grabs,’ it is possible for expenditures to establish rights to fully dissipate the rents, leaving the efficiency gains from privatization in question.”[33] Even, “inefficient” liability rules that clearly specify who is liable have some very desirable characteristics. Secure property rights eliminate the incentive to litigate that arises when property rights are not secure (or even when a clearly specified change in liability suggests a significant transfer of rights).

Continual effort to claim nonexclusive income (which arises under the uncertain liability rules that characterize the end of traditional negligence standards and their replacement by strict liability, as well as the other changes that are under way) may fully dissipate any efficiency gains that could arise by eliminating the “wrong” assignment of liability (wrong in the sense that the low-cost avoider is not liable). Further, it is not at all clear that the demise of traditional tort standards is appropriate even when the producer is the low-cost provider of information. The individual user of a product is likely to be the low-cost accident avoider, after all, given information about potential harms. Thus, a negligence standard is likely to be the most efficient standard, and the dissipation of rents that we are observing may actually be arising in the context of a move to less efficient liability rules.

Schuck (1986, p. 13) noted: “In reality, the Agent Orange litigation [and we can add asbestos, DES, Dalkon Shield, etc.] prefigures a grim dimension of our future; it is a harbinger of mass toxic torts yet to come.” He suggested that future disputes may involve pharmaceuticals, food additives, industrial compounds, pollutants, toxic waste landfills, radiation, or any of an unpredictable number of unknown technological advances. While he may be right, it will not be because of the technological advances and the “toxic age”; it will be because the government has failed to clarify and secure property rights. Indeed, the same trends are also likely to accelerate in the nontoxic areas of product liability. If some courts continue to feel that they must “fashion new standards” as new issues arise, rather than hold to traditional tort principles, then they will continue to send out signals that they are willing to entertain new reasons for redistributing producers’ incomes. If potential plaintiffs do not notice this, tort lawyers will, so continued recruitment of clients can be expected in the evolving race to capture increasingly less secure property rights to producers’ incomes. This process ultimately could completely undermine the incentives to seek and produce technological advances (or to produce at all) unless the pressure that is being put on state and federal legislatures forces them to assign the insecure property rights to someone (producers or workers) in order to end the continual dissipation of nonexclusive income through the litigation process.[34] As Epstein (1982, p. 46) concluded: “there is not an endless supply of water in the trough. We must somehow undo the unsystematic and unthinking judicial activism. Otherwise—as more and more cases work their way through the legal system, and more and more firms take the bankruptcy route—the only doors left will be closed, and marked ‘No Exit.’”

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Footnotes