December 2003
Lawsuits without Injuries?

While plaintiffs have traditionally been required to demonstrate some form of harm or damage to file a lawsuit, recently proposed definitions of harm appear to be broadening substantially the scope of tort litigation.  At the forefront of this legal innovation is the "benefit-of-the-bargain" theory of damages: if a product is shown to have harmed some consumers, unharmed consumers have a claim against the manufacturer on the basis that they would not have paid as much for the product had these risks been known beforehand.  On December 17, panelists addressed the merits and disadvantages of "benefit-of-the-bargain" lawsuits.

Richard Epstein
University of Chicago

The meaning of the traditional rule, "no harm, and no foul" has changed.  In the current litigation climate, the words "no harm" might mean "no present harm," "no hypothetical harm," "no anticipated harm," or "no imaginary harm."  This is happening as products are becoming safer; while the number of actual injuries is diminishing, the need for lawsuits never diminishes. 

Brian Anderson
O'Melveny & Myers, LLP

There are some theoretical exceptions to the idea of present injury.  Fear of future injury is one, and in some circumstances that theory makes sense.  If you take a drug, and 90 percent of those who take the drug will die without quick intervention, most reasonable people would find it acceptable to bring a lawsuit for relief now.  The second exception is the theory of diminution of value (sometimes called "benefit-of-the-bargain") in which a consumer purchases a product with some expectation of performance commensurate with the price, and finds that those expectations are not met.  In some circumstances, it might be reasonable for the consumer to seek compensation for the difference in value.

However, those narrow exceptions have been expanded beyond their good use and employed in class actions in which the class represented has suffered no injury.  There are five major problems with allowing lawsuits of this kind to proceed: 1) the invention of claims by plaintiffs' lawyers; 2) large amounts of money going the to unharmed; 3) the cost of suits raising the price of the product for future consumers; 4) the courts taking on complex public policy questions as a part of the judgment; and 5) lawsuits trying to do the job of regulatory agencies that are much better equipped to render good decisions.

Michael Kelly
University of San Diego

In contract law, if you pay $1000 for a laptop based on representations of the product, and it turns out to be worth only $950, that is a real $50 injury.  The misrepresentation is treated as a warranty.  Most of the country appears to think that damages in tort should be treated similarly.

In theory, it is sound to say that tort and contract should be different.  In both, we seek to return injured parties to the position they would have held had the harm not occurred.  In contract, the harm is the failure to deliver the promised good.  In tort, the wrong is making the false statement, making damages the difference between what the consumer paid and what he would have paid had the truth been told.  Unfortunately, that compensation does not offer enough in the way of deterrence, and if we want to deter fraud we have to impose additional sanctions.

If a consumer relies on a misrepresentation of a product, that consumer is deprived of his ability to get a better product or make a better deal.  By eliminating or downplaying the importance of that economic loss, we undermine the ability of individuals to make their own best deals.  In cases of fraud, contract and tort have the same goal, which is protecting peoples' ability to make profitable deals.  Does that justify all of the ills practiced under the name "lawsuit without injury?"  No, but in most cases, we are dealing in the realm of contract with injuries that are very real.

Moin Yahya
University of Alberta

In the area of consumer products, the plaintiffs' general argument is that consumers purchased amount X at price Y, and had they known that the product was flawed, demand would have decreased and consumers would have paid less for it.  The difference between the actual price and the hypothetical price is the benefit of the bargain that the plaintiffs are seeking.  Under the logic of both law and economics, there is no recovery for such injury.

In tort law, future harm is not enough for a charge of negligence.  Misrepresentation is a doctrine that comes from tort and contract-and like negligence, it requires an actual present damage for there to be compensation.  Most case law rejects recovery for economic losses using negligent misrepresentation unless there is a special relationship (such as particular knowledge by the defendant of purpose for purchase) or specifically alleged fraud.

In economics, we must estimate the demand for the faulty product.  In a strict liability regime, a firm charges an insurance premium reflecting the expected damage from a product.  (If there is a 1 percent chance of $100 of harm, the firm will charge $1 per unit sold as an insurance premium.)  A consumer who knows that this regime is in place will pay the price plus the premium in order to ensure compensation in case of an accident.  Hence, the price that the consumer will pay does not depend on the consumer's assessment of the product itself.  There is no unjust enrichment, no benefit of the bargain, and hence under equitable remedies or negligent misrepresentation, no recovery.

Jonathan Klick
AEI

The definition of harm depends, in part, on the question of who has a right to the surplus or the profit.  If the consumer should always have the benefit of the bargain, presumably, the loss of that benefit is not just the difference in price times the number purchased-it should also include the surplus from units that were not purchased, but would have been if the price were lower.  However, this raises several problems.  First, we do not know what the supposedly "fair" price of the item would be because it is not observed.  Second, it is difficult to estimate the unobserved portion of the demand curve for either the individual or the market as a whole.  Third, it is possible that at the "fair" price, the product would not have been produced at all, bringing the consumer surplus to zero.  And fourth, if the producer surplus were poured into research and development, it is possible that innovation would decrease on the margin.  If, however, the producer has a right to this surplus, there is clearly no harm because the consumer is better off having paid the market price than he would have been not purchasing the product.

In terms of efficiency, if benefit of the bargain damage theories are allowed ex post, there can be no effect on the efficiency of completed transactions, but going forward, market prices will capture the insurance premium for this type of "harm."  In terms of fraud and disclosure, the efficient level of disclosure will hinge on individuals suffering actual harms from using a product they would not have used under full information.

AEI research assistant Kate Rick prepared this summary.