Innovation and our product liability system: let us end the conflict on incentives.

EVERY COMPANY has a "risk budget" for betting on the future. Innovation, research and development are a part of it. So are a company's investments, new marketing programs, and other initiatives they hope will pay off later. Increasingly, our country's legal liability system must be included in that risk budget too, because of the great uncertainty it imposes whether companies act responsibly or not. With today's liability system, the risk of paying out, not the chance of paying off, becomes an important factor on product decisions.

Courts are subjecting the makers of useful products and manufacturers who opt for improvements to the risk of severe sanctions, including large monetary awards. While they seek to provide compensation to plaintiffs, the ground rules are not always clear. To account for this liability in their "risk budgets," companies often are forced to scale back the risks they take on innovation by withdrawing safe and beneficial products and diverting resources that would otherwise go to promising research programs.

To some extent, innovation has become a tired word, but we should never stop holding it up as an important goal. American business and our nation will prosper only if we can maintain our position as a world leader in developing useful and desirable consumer products. Most American businesses work to achieve this goal, even when faced with a legal system that is not always in harmony with encouraging innovation and achievement.

Let me be clear on where I stand on those who knowingly make dangerous and defective products -- they should be subject to liability. The new European Community Product Liability Directive and product liability laws in many of our states fulfill that laudable purpose. What I am concerned about are impediments in our product liability system that have a contrary purpose and prevent companies from taking more risks on innovation. This article will briefly focus on several aspects of our legal system that stifle innovation and why they need to change.

RETROACTIVE, CONTRADICTORY, AND CONFUSING LAWMAKING

Few realize that our product liability laws, generally speaking, are not made the way most law is made, that is, by legislators. Product liability law is created by courts. Court-created product liability law is a vestige of colonial times when our country adopted the English legal system of "common law." Under this system, judges develop rules on a …