A choice-of-law approach to product liability reform

My former George Mason colleague Mike Krauss discusses choice of law and products liability in today's WSJ. He advocates a federal choice of law rule applying the law at the point of sale. Under that rule, he says,

if a West Virginian bought his lawn mower in Maryland, it would be Maryland law that determined product liability, even if an accident involving an alleged defect happened later in West Virginia. (Labeling is generally easy and would provide reliable identification of the state of first sale.) Manufacturers could now price goods in each state to reflect that state's liability rules -- allowing consumers to pay for the liability protection they wanted. Competition would provide consumers with knowledge of what this all means. West Virginia retailers would have a keen incentive to explain to consumers how they receive greater protection -- in return for a higher purchase price -- much as current retailers of name-brand products have an incentive to stress the reasons why the brand they sell carries a premium price as compared to generics. By contrast, under current law product liability suits typically set an indigenous individual plaintiff against an out-of-state corporate defendant. Here juries tempted to engage in wealth transfers can do so at marginal expense to their local economies.

The problem with Krauss's solution is that it forces manufacturers to comply with the law in each state in which they sell. National sellers need to be able to have one law apply, and to be able to determine what law that will be at the time of making the product. A federal choice-of-law rule focusing on point of sale will not let a company be guided by a single standard unless a uniform state law emerges. And any such uniformity would foreclose the benefits of variety and competition.

The choice of law rule that best promotes this single-standard objective is one that lets the manufacturer designate the applicable law in a contract with the consumer. The alternative is a federal products liability law, but this would substitute a single law and sacrifice the potential of our federal system for competition and variety.

I work out the theory on contractual choice of law in several places, including From Efficiency to Politics in Contractual Choice of Law, 37 Ga. L. Rev. 363 (2003). The most current application of the theory is my paper with Erin O'Hara, Corporations and the Market for Law, which provides some glimpses into our forthcoming book, The Law Market.

The main question with contractual choice, which is particularly important when it comes to products liability and consumer contracts general, concerns the extent to which states should be able to refuse to apply the contractually selected law. Any federal contractual choice of law statute should allow states some power to trump choice-of-law clauses. To minimize unpredictability, states should have to express limitations clearly by statute rather than by judicial decisions on an ad hoc basis under a general standard.

If a state decides that it wants to trump contractual choice of law, to what contracts should this regulation be applied?  Perhaps states should be able to regulate in favor of their own residents. This is effectively the current rule, since a consumer can usually sue in his home state and get that state's law to apply.

The problem with a state-of-residence approach, as Krauss suggests, is that it doesn't let manufacturers precisely price liability risks because consumers might shop in low-liability states and still get the advantage of their home state's rule. But the point-of-sale approach forces consumers to know the laws of any state in which they shop rather than just their home state's law. Also, you might get less regulation under a point-of-sale rule than state-of-residence approach because merchants would necessarily be subject to the point of sale rule, but not as to all of their customers under a state-of-residence approach. Of course less regulation is not necessarily a bad thing.  And merchants would be able to avoid regulating states by setting up shop in permissive states.

In any event, my lesson for today is just this:  a choice-of-law approach to product liability reform needs to at least consider the concept of contracting for law.