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Paul Cox

I was surprised to read Caveat Emptor used in the San Diego Pension plan. The claim was made by someone close to the $100 million loss as a result of the Amaranth Hedge Fund.

If people are required to understand the complex mathematic calculations of the Hedge Funds and Mutual Funds, then there is a disconnect in the accountability of those funds.


As a lawyer who has practiced in the tort system for years, unfortunately the underlying economics have little to do with "fault" and more to do with the broader social issue of the lack of any real "safety net." Although juries do their job and do try to pay attention to the law, the real driver of the tort system (not the few "jackpot" verdicts which tend to be overturned on appeal) is the fact that "fault" gives way to "necessity" when a jury is faced with an injured party who it can assume is not covered by any real government safety net. (or an inadequate one).

Edward Rubin

1. Under classical principles of negligence litigation the system did operate along these lines; where the buyer was negligent in failing to exercise due care, the buyer lost. That is not quite the same thing as caveat emptor, which implies a more thorough and systematic anti-buyer bias and was typically used as shorthand for the buyer effectively having no remedy at all.

2. If the buyer would have to prove negligence by the defendant, then it seems unfair to have the buyer lose when it is unclear if the buyer could have prevented the damage by the exercise of due care. Even when contributory negligence was a complete defense, it was an affirmative defense on which the defendant had the burden of proof; if the buyer can prove negligence but the seller cannot, then the seller should lose. We have a problem with our tort system because modern doctrines like comparative negligence and strict liability have destroyed the classical balance, but it seems excessive to retreat in the name of economic efficency to a place we were never in, even a century ago and more.

3. As to the collar on punitive damages, I wonder how the likelihood of lawsuits being brought can be convincingly established. In many cases I am confident that for all the blather about our super-litigious society, the real ratio is much lower than you suggest and will in many cases lead under your suggested formula to astronomical multiples. For example, how many individual wrongful death lawsuits were ever brought against the tobacco companies, compared to the millions who died of lung cancer in the era before the truth about tobacco was publicized? A few among millions, that's for sure. There is no glib or easy solution to the punitive damages issue.

James McNiece

I believe that some simple institutional reforms of the tort system could work to bring damages to be more in line with their economically efficient levels.

The simplest would be to end the practice of electing judges. Research by Alex Tabarrok and others has shown that in jurisdictions where judges are elected, damages awarded from torts are much higher than in jurisdictions where judges are appointed. This is likely due to the fact that judges raise a large amount of their campaign funds from trial lawyers.

A second reform would be to remove juries from product liability and medical malpractice lawsuits, so as to reduce the likelihood that torts become lottery tickets for plaintiffs. I don't believe that juries have sufficient training and knowledge to come to an economically efficient damage award.

Lucas Issacharoff

"To a first approximation, the multiple in punitive damages should be determined by the inverse of the probability that a real tort is discovered and litigated. For example, if the probability of bringing such a lawsuit is 1/3, punitive damages should be 2 times actual damages in order to bring the expected cost to producers of the torts, through the sum of compensatory and punitive damages, in line with expected damages."
This neat formula ignores one of the key justifications for punitive damages. If a company is faced with the choice of making a defective product or a safe one, the choice between the two should not be cost-neutral. A system in which it costs the same to produce a bad product and a good one is not in fact the most efficient one, for it ignores the deadweight loss that a bad product causes.
To use the old saw, an ounce of prevention is worth a pound of cure. The purpose of tort law is not merely to remedy damages, but to discourage bad behavior among producers; otherwise tort law is merely a mechanism for transfer of wealth rather than a system for increasing efficiency.


I don't believe that juries have sufficient training and knowledge to come to an economically efficient damage award.

I am not clear why judges are better able than juries to do this. The WSJ article at hand suggests that such calculations are wishful thinking.

(I assume the damages at issue are punitive, since actual damages are not computed for their "economic efficiency.")

Another issue is, why should punitive damages be paid to the plaintiff?

Maybe punitives should be figured as triple the reasonable attorney fees of the plaintiff, with the attorney paid & the rest put into the state treasury.


Interesting that the old favorite of the anti-tort crowd, millions for McDonald's coffee spills, is brought up here. I thought that one of the main points of that case was that the buyer did in fact lack certain essential information, that the coffee was much hotter than typical brewed at home coffee. The hotter coffee was more likely to cause actual injury, as opposed to ruined pants. I might reasonably take a 1% chance of ruined pants for the convienence of coffee, but would calculate differently if I thought I could suffer third degree burns.
One thing I have not seen noted here is determining which party can more efficiently guard against accidents. Certainly we should take into account the marginal costs of prevention to both plaintiff and defendant.
In response to Mr. McNiese: I am all for ending the election of judges, but I have often heard the complaint that elections leave judges indebted to big business. I suppose partiality is in the eye of the beholder, but I would be very interested to read the studies that you cite since I have not heard of them before.
Of course, appointed judges are appointed by someone who most likely has an agenda. That someone will look to guarantee that they rule in the prefered manner. If the judges have long or life terms, the appointer will not have continued employment to dangle in front of them, but will most likely find some other way of ensuring performance. Perhaps appointed judges will be more openly ideological than elected ones, since their ideology suggests they are more likely to rule in the desired manner even absent political or employer pressures.

Vera Kashirtseva

Unfortunately this "study" and its results represent so many studies that we believe on a routine basis. We tend to not question authority (or even question whether the authority is truly an authority on the matter) and once certain beliefs are ingrained it is very difficult to dispel them. People who are against a highly litigious society will only welcome this study and will not examine the evidence. People who support it in some way or benefit from such system, may try to put the results in perspective, find some reasonable flaws with the data, but will most likely just dismiss the evidence. Too many bad studies mislead the public.


As Anderson mentioned, I have wondered why plaintiffs should be entitled to the punitive damages. Perhaps damages should be paid to the federal or state government or to cover judgments against insoluble defendants or to be awarded to cover costs or attorneys fees as judges see fit. I think that currently the incentives are set up incorrectly.
Though judges may not be in a better place than juries to decide complex product liability or medmal suits, a panel consisting of certain types of people might be. A panel of experts, consumer representatives, economists, etc. would have the appropriate insight to render a judgment. In an increasingly scientific world, lay people do not have the necessary background to understand some of the complex portions of products or decisions.


Posner cuts apart a report using made up numbers.

Becker posts his comment without any numbers at all.

Becker would like to see "a bias in the tort system toward buyer responsibility." Apart from what this would mean for negligence or product liability law, it is far from clear this approach would more economically efficient, either in reducing litigation or in reducing overall costs to society.

People are notoriously bad at evaluating small risks of harm. A 1 in 10,000 and a 1 in 1,000,000 chance are often both treated as zero. Isn't it more efficient to place the burden of reducing harm on the person most knowledgeable about the risks, best able to reduce harm, and best able to spread the costs to those using the product? There would be gigantic transaction costs if every consumer had to research into each products' safety. Becker might say that he is only concerned with obvious risks, but his proposed standard is not clear, and the current system already reduces recovery in negligence cases where a plaintiff is at fault.

"A presumption of caveat emptor would eliminate a sizable fraction of all tort cases[and those elminated] would tend to have the highest social cost . . . ."
In the context of strict products liability, Beckers conclusion is counterintuitive. Currently almost all matters are settled before trial. Uncertainty creates an incentive for litigation. Simple rules like strict liability create certainty. Becker's new "caveat emptor" would reduce costs of producers of dangerous products, but would probably foster a more litigation. "Common sense" is good for op-ed's, but it is not a very predictable rule of law. There is no reason to believe that Becker's new bias would reduce the amount of contentious litigation and, in the short run, is likely to greatly increase the costs of litigation as courts struggle to discover its boundaries. (The most predictable rule -- leading to the least litigation -- would be that a producer is liable for every harm its product causes, regardless of fault.)

Many people are outraged by (exaggerated) stories of tort recovery, (see http://www.commondreams.org/views05/0122-11.htm), but the alternative would be thousands of more deaths and injuries every year. Becker's heart may bleed when McDonald's pays for harm caused when it sells unreasonably hot coffee to people at drive-thrus, but the current product liability rule has probably prevented thousands of people from experiencing severe burns to their crotch. In any event, anecdotes are bad sources for public policy.

Becker also does not seem to understand the nature of punitive damages:
"punitive damages should be restricted to no more than four times compensatory damages."
Punitive damages are awarded for malice, oppression or fraud. This generally requires an intentional act violating the law, with the purpose of harming someone. I would hope that this behavior is already rare. I don't really see the benefit to creating an artificial (and largely arbitrary) ceiling on punitive damages to protect those who intentionally hurt others.

Becker's opinion appears to be the result of his own bias against government intervention, even in the relaxed form of the property-law-like tort system.


Tom... I've had similar thoughts about punnies as they most often seem to reflect (potential) harm to a class or cohort. I think you'd not want to deny attorneys their contingencies as there are too many cases where the harm to the plaintiff isn't enough to warrant the costs of the suit but the suit would still serve a public good.

Your second paragraph is interesting too; perhaps you know that in the UK they've some sort of schedule for loss of limbs and I think that once the jury decides fault a commission sets the amount of the award. I'm glad you include consumer reps as boards of "experts" can quickly lose touch with the "real world".

Once a lawyer friend of mine was off on a VERY spendy trip to document the income potential of a man hurt on the job. This struck me a being wasteful and well.... nuts, and I suggested that the court should count any lost arm as the same regardless of its "lost earnings". He disagreed (of course!) but it strikes me that those who have high earnings that are dependent on hands etc. would have the option of taking out additional insurance.

Kind of a messy area; should a defendant in an auto injury case be liable for much more if the plaintiff is a dentist instead of a housewife or low income person? Seems no easy answer.

Ha--ha! Want to extend that panel of experts and consumer reps to Congress? It's often a hoot to see them trying to get their arms around fast moving communications issues and the Congressman who's read even chapter one of an Intro to Econ is a rare bird indeed.

To be more fair though, even with staff, it seems an impossible job to serve on several unrelated committees and keep up with floor votes, constituent service etc. (I'd LIKE to relieve them of having to spend most of their time fund raising for the NEXT election with some means of public funding of campaigns........ and an expectation of doing more work and meeting with constituents MUCH more!)


It's my understanding in the MacDonalds case that the burn victim was a passenger and the car was not moving, contrary to what Judge Posner stated. Also, the coffee was not only hotter than that at home, it was hotter than that typically sold by any chain. In addition, the woman sued for medical costs; the suit only rose when MacDonald's was perceived as acting in a high-handed way. Some of the items below are certainly debatable or irrelevant to the plaintiff's case, but the facts are often misrepresented.


"McFact No. 1: For years, McDonald's had known they had a problem with the way they make their coffee - that their coffee was served much hotter (at least 20 degrees more so) than at other restaurants.

McFact No. 2: McDonald's knew its coffee sometimes caused serious injuries - more than 700 incidents of scalding coffee burns in the past decade have been settled by the Corporation - and yet they never so much as consulted a burn expert regarding the issue.

McFact No. 3: The woman involved in this infamous case suffered very serious injuries - third degree burns on her groin, thighs and buttocks that required skin grafts and a seven-day hospital stay.

McFact No. 4: The woman, an 81-year old former department store clerk who had never before filed suit against anyone, said she wouldn't have brought the lawsuit against McDonald's had the Corporation not dismissed her request for compensation for medical bills.

McFact No. 5: A McDonald's quality assurance manager testified in the case that the Corporation was aware of the risk of serving dangerously hot coffee and had no plans to either turn down the heat or to post warning about the possibility of severe burns, even though most customers wouldn't think it was possible.

McFact No. 6: After careful deliberation, the jury found McDonald's was liable because the facts were overwhelmingly against the company. When it came to the punitive damages, the jury found that McDonald's had engaged in willful, reckless, malicious, or wanton conduct, and rendered a punitive damage award of 2.7 million dollars. (The equivalent of just two days of coffee sales, McDonalds Corporation generates revenues in excess of 1.3 million dollars daily from the sale of its coffee, selling 1 billion cups each year.)

McFact No. 7: On appeal, a judge lowered the award to $480,000, a fact not widely publicized in the media.

McFact No. 8: A report in Liability Week, September 29, 1997, indicated that Kathleen Gilliam, 73, suffered first degree burns when a cup of coffee spilled onto her lap. Reports also indicate that McDonald's consistently keeps its coffee at 185 degrees, still approximately 20 degrees hotter than at other restaurants. Third degree burns occur at this temperature in just two to seven seconds, requiring skin grafting, debridement and whirlpool treatments that cost tens of thousands of dollars and result in permanent disfigurement, extreme pain and disability to the victims for many months, and in some cases, years."


Nessie, These look more like "plaintiff facts" than "facts" per se. I really doubt that real "Mcfacts" would be posed in such a fashion. I could go through the entire list pare it by about 30% on relevance alone, the others require supporting and or corroboration before they become "facts". Otherwise, they're just statements. ;)


The claim that "A presumption of caveat emptor would eliminate a sizable fraction of all tort cases that have been brought in recent years," is highly implausible.

In real life a small universe of highly mundane facts -- automobile accidents, slip and fall incidents, and medical mistakes dominant the world of torts. Of tort cases that went to trial in 2001, the Department of Justice found that 53% were automobile accidents, 16% were premises liability cases (with slip and fall making up a huge share of that total) and 15% were medical malpractice cases. About 5% involved intentional torts (other than defamation, conversion or false arrest). Only about 2% were product liability cases.

In practice, most of the cases brought, moreover, even within these categories, are obvious, simple cases. They are people running red lights, floors left wet without warning in a senior center, administration of a clearly incorrect drug, and people getting punched in the face without provocation.

There are rare close cases, but the heartland of torts is huge.


Pardons for being obtuse Ben, but really -- what thinking person places a take-out cup of hot coffee (of whatever temperature) (with a flimsy plastic lid that you can never tear the mouth hole for quite right) within centimeters of one's most delicate organs?

I mean really.

Why not sue the car manufacturer for failing to provide cup holders?


Sorry guys but the McDonalds case is a fine example of a law suit making improvements to our world. And! the facts are even worse for McD's or those trying to use the case as an illustration of a frivolous suit than the above.

First off, she did not sue....... but simply asked for medical costs. As stated McD's (moronic?? considering her week long stay in a hospital.) law dogs brushed her off.

As wavemaker points out McDs used to use those nasty styofoam cups which become ever more limp as temperature rises, making it tough NOT to collapse the thing and drop it with the lid coming undone in the process. As for keeping it away from one's legs; when seated in a car where IS it going to be?

Improvements since!! McD's sets and locks the temperature setting and still provides coffee that is hot enough. Most seem to have given up the foam "bomb cup" in favor of a cardboard cup with a decent latte style top suitable for mobile use and is biodegradable to boot.

As stated McD's exec testified that they had NO plan to lower temps from the excessive and dangerous 185........ but they did. Today it's a much safer under 160.

Synergistic benefits? Hard to measure, but after selling decent coffee in a decent cup McD's realized they could add being a lower cost alternative to Starbucks to their otherwise failing business model.

The final settlement? No one knows, as McD's appealed and given the age of the plaintiff a deal was cut....... no one got rich.

The jury awarded Liebeck $200,000 in compensatory damages. This amount was reduced to $160,000 because the jury found Liebeck 20 percent at fault in the spill. The jury also awarded Liebeck $2.7 million in punitive damages, which equals about two days of McDonalds' coffee sales.

Post-verdict investigation found that the temperature of coffee at the local Albuquerque McDonalds had dropped to 158 degrees fahrenheit. The trial court subsequently reduced the punitive award to $480,000 -- or three times compensatory damages -- even though the judge called McDonalds' conduct reckless, callous and willful. No one will ever know the final ending to this case. The parties eventually entered into a secret settlement which has never been revealed to the public, despite the fact that this was a public case, litigated in public and subjected to extensive media reporting. Such secret settlements, after public trials, should not be condoned. -----



HATFIELD WROTE: " could go through the entire list pare it by about 30% on relevance alone"

Yes. That's why I wrote:

"Some of the items below are certainly debatable or irrelevant to the plaintiff's case"

My overall point that the case has been mischaracterized still stands.

Dostoevsky's Poodle

Although Becker's comments are usually worth the perusal, readers of this blog should be aware of how thoughtless he can be. I was recently reviewing a posting of his from Nov. 2006 on crime. There he asserted: "Good pay would attract more honest men and women to the [Mexican] police force." Supposing you, the reader, cannot see how stupid this "thought" is, I would only need to point out all the white-collar crime that exists (much of it never detected and prosecuted, one can assume). Do you think that all the men and women who are attracted to high-paying corporate, legal, and accounting jobs are more honest, pursuing, as they are, the most high-paying jobs in the economy? I assume that merely to pose this question is enough for readers to see how silly Becker can be. As in the case of most bloggers, the typing precedes the thinking. And if he did "think" before he typed that comment, so much the worse for him, and his readers. My own (charitable) conjecture is that Becker typed without thinking, for he is usually an economist who fully grasps that "honesty" like other pieces of behavior, is a response to incentive. In other words, people are not BORN honest or dishonest.


McD did not hide the fact that its coffee was hot and its cups cheap. Reasonable people knew that and took appropriate precautions. In fact, my wife patronized McD for years precisely b/c its coffee was so hot that it stayed hot -- the way she liked it. When she took our car without the cupholders, she poured the coffee into her favorite travel cup. If she forgot that cup, she didn't by McD coffee to go. This is common sense. A reasonable person does not stick a obviously flimsy cup of obviously hot coffee between his legs. My wife no longer prefers McD for coffee, since its coffee doesn't stay hot any longer than anywhere else she can drive through.


Your comment is dog poo. Becker's point is that poverty is an incentive to steal, and poverty level wages don't alter that fact. If, however, one raises wages to a moderate level that particular incentive is diminished. This is probably true at all levels of wages, since the higher one's wage the more one has to lose if caught stealing. One does not have to believe that higher income earners are born more virtuous to believe they that they are less likely to steal. I agree with you that lots of folks who participate in blogdom type before they think.


Gentlemen, Theft is theft. No matter how the socio-economic slicing and dicing is done. How else does one explain the likes of Enron, World Com, Tyco and the likes. As one put it, "A man might steal from a boxcar, but a lawyer or executive might steal the whole damn railroad". ;)


On second thought, I think I was unfair to Poodle, though I think he was being a bit too literalist to Becker. I suspect Becker was trying to say that increasing wages would reduce the incentive to steal, not that higher wages actually disproportionately attract honest people as opposed to dishonest people. I agree that the truth of Becker's statement, taken literally, as explained by Poodle is far from obvious. Since Becker is a smart guy I read him less literally.

Dostoevsky's Poodle

I like the point you are raising about reading "literally" (or "loosely"). When we have formed the impression that someone is "intelligent" we are inclined to cast about for "profound" meaning, rather than to fix upon the "literal" stupidity.
I thought most of Becker's comments in the Nov. posting were insightful. Nevertheless, the statement of Becker I cited is stupid, and, since I, too, esteem Becker, I assume that he would prefer not to have written it. For, once again, the idea that "good pay" attracts "honest" people is quite preposterous. (The motive of gain is what causes someone to respond to a compensation offer.)
You asserted: "the higher one's wage the more one has to lose if caught stealing". Fine, you impose upon yourself the challenge of explaining why corporate 6-figure earners break the law to get 7 figures. They have a lot to lose, but still do the deed.
I don't think it's unreasonable for you to suppose that the poorer you are the more probable that you will commit crime. (As Oscar Wilde counseled: Don't cheat if you're holding the winning hand.) The unreasonable thing is to suppose that poor people are more _dishonest_. It is simply a matter of incentives. The devil makes work for idle hands: the poor and unemployed usually incur a much lower opportunity cost in attempting crimes. So, I end by stressing that "honesty" and "dishonesty" are responses to incentives (or the lack thereof) and calculations of detection-probability and consequences. I think we can safely assume that those guys at Enron (to whom Sir Hatfield referred) were very confident that they could execute their schemes without being caught. I am also inclined to think that their confidence was perfectly rational.
I will continue to read Becker's postings because most of his comments are insightful. (Usually Posner's are a little better.) One cannot expect him to avoid occasional stupidities. Why? Incentives again. In a blog, as against a book or article, the incentive to write flawless sentences is much smaller. I thank both Becker and Posner for continuing to write thought-provoking commentary. For my own recreation, and Schadenfreude, though, I shall continue to identify stupidities, hoping a la Mandeville, that my indulgence in Schadenfreude shall enlighten and edify all my fellow readers and commentators.


Poodle, Try Yeoman. ;)

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