Apropos of Walter�s post on the NLJ story regarding Class Action lawsuits under state consumer protection statutes, where plaintiffs claims they wouldn�t have paid the purchase price for the product if knew that it was defective or harmful. These are also known as no-injury lawsuits. The big one a few years ago was the $10 billion verdict against Philip Morris for their light cigarettes. The case was overturned on appeal at the Illinois Supreme Court, but currently there is a class action certification appeal pending in front of the Second Circuit.
If there was one area of economics that I wish lawyers would understand, it is the basics of price theory or consumer demand. Prices serve as an informational clearinghouse, an idea that is neither new nor novel. The Nobel Laureate in economics Hayek explained this over fifty years ago in his article The Use of Knowledge in Society, 35 Am. Econ. Rev. 519 (1945). There he argued that the price system was �a mechanism for communicating information�, i.e. the price mechanism allows the communication of information in a dynamic fashion without the need for a centralized information gathering mechanism.
How does this relate to no-injury lawsuits? The price that we observe in the market for any product contains information about the firms� assessment of the likelihood of injury and the consumers� assessment of the utility from the product plus any apprehension of injury. Setting aside a case where the company intentionally misled consumers (which is what consumer protection statutes are meant to deal with), most of these cases never can prove any intentional conduct or actual injury. They all argue that prospectively, the plaintiffs now realize they might be injured and they would have paid less had they known this.
But are all consumers the same? When it comes to a variety of products, consumers are looking for different things. Some are looking for quality and for them price does not matter. Some are looking for a bargain and for them it is more about price than performance. The aggregate of all these demands is what determines the final price in the market (as well as the supply). Therefore, when plaintiffs claim they paid more than would have had they know the product was defective, it is not clear which type of consumer they are.
Recall that most firms set aside a certain amount of cash to deal with liability claims arising out defective products, drugs, etc. Hence, they have charged an insurance premium from the various customers for the event of something going wrong. No-injury lawsuits are, therefore, akin to a customer whose house has not burnt down saying to his insurance company �there is a good chance it may catch fire, so I want my payout now�. What happens to those consumers who are actually injured? Well they would undoubtedly sue and recover the harm they suffer � but that is exactly the amount of money the firm had set aside for compensation. The no-injury plaintiffs want to recover twice: once before injury and presumably once after. The result would be increased prices that the consumers would face.
I suspect that no-injury plaintiffs would never foreclose their opportunity to sue if they were actually injured by using the product. One court understood this and stated:
Public policy concerns, in our view, also dictate that we reject plaintiffs� claims, for it would be manifestly unfair to require a manufacturer to become, in essence, an indemnifier for a loss that may never occur. Plaintiffs� argument, basically, is that as an accident becomes foreseeably possible, upon the occurrence of certain contingencies, due to a design aspect of a product, the manufacturer must retrofit the product or otherwise make the consumer whole. However, under such a schematic, as soon as it can be demonstrated, or alleged, that a better design exists, a suit can be brought to force the manufacturer to upgrade the product or pay an amount to every purchaser equal to the alteration cost. Such �no injury� or �peace of mind� actions would undoubtedly have a profound effect on the marketplace, as they would increase the cost of manufacturing, and therefore the price of everyday goods to compensate those consumers who claim to have a better design, or a fear certain products might fail.Frank v. DaimlerChrysler Corp., 741 N.Y.S.2d 9, 16-17 (N.Y. App. Div. 2002).
From a demand perspective and the question of what type of consumer is the plaintiff, consider the two types of consumers: one who values price and one who values quality.
Let us consider a drug, for example. What a class action would have to discern is which consumers actually were shopping based on quality and safety and what was their price elasticity on this. Price elasticity is a measure of willingness to pay as a function of quality. The studies show that a large majority of consumers focus only on price, while a select few actually focus on the characteristics of safety. Those who focus on safety, actually don�t care what price they pay, i.e. they are price inelastic. (see this study and this one for example)
The result is that larger group would have no claim for compensation, because they got the bargain they paid for, whereas at best the smaller group has some claim. The small group, though, are price insensitive, and so even if they care about the quality, their utility and hence willingness to pay will not be diminished by a higher price. They are price insensitive, and would have paid the same price as long as the quality they are looking for, namely efficacy, was present. This means that for this small group, the measure of compensation (also known as the �benefit of the bargain�) is also zero.
I have more details including measures of what consumers are willing to pay for safety in my paper titled Can I Sue without Being Injured?: Why the Benefit of the Bargain in Product Liability is Bad Law and Bad Economics? 3 Geo. J.L. & Pub. Pol'y 83 (2005).
As an aside, (also addressed in my paper), if these claims had been brought under standard tort claims, they would all fail as they would be dismissed under the economic loss doctrine (unless you could allege intentional misrepresentation). The consumer protection statues are claimed to offer more recovery, but as I show in the paper, these claims are also highly suspect.