In the Growing Wave of Climate Litigation, Could the Automobile Industry Be Next?

 by Martin Olszynski, The Energy Collective 

The oil industry is increasingly the focus of climate change litigation, writes Martin Olszynski, Assistant Professor at the Faculty of Law of the University of Calgary. Carmakers have so far not been targeted, but Olszynski thinks that could change – especially if they continue to urge lawmakers to relax environmental standards and promote the sales of light trucks and SUVs.

Over the course of the summer, five California municipalities (San Mateo County, Marin County, and the City of Imperial Beach as a first group, San Francisco and Oakland as a second) filed statements of claim against many of the world’s largest oil and gas companies – including Exxon Mobil, Chevron, BP, Shell, and Canada’s own Encana – claiming that these companies should be liable for the current and future costs incurred by these municipalities as a result of climate change, and especially those associated with rising sea levels. In this post, I consider whether the world’s top automobile manufacturers could be next in the defendant line.

I’ve been thinking about automobile manufacturers’ potential liability for a while now, having first considered the issue in a recent article co-authored with Professors Sharon Mascher and Meinhard Doelle (which we blogged about here). This post’s focus on car manufacturers has been motivated by two separate but related developments in particular: (i) the automobile manufacturers’ December 2016 letter to Scott Pruitt, the then-new head of the United States’ Environmental Protection Agency (EPA), requesting that he reconsider the “strict” fuel efficiency standards for cars and light trucks established by the Obama administration; and (ii) the industry’s response to a potential zero emission vehicle (ZEV) mandate currently being considered here in Canada, and especially the industry’s suggestion that it “can’t control consumer tastes”.

As further set out below, the automobile industry’s letter to Scott Pruitt suggests an exclusive focus on regulatory standards as determinative of the industry’s applicable standard of care (and potential liability for the breach thereof), which, under Canadian common law at least, would be misplaced. Similarly, the industry’s refusal to acknowledge its role in shaping consumer preferences also appears misplaced and may be a source of liability going forward. 

The California suits

The California climate change statements of claim have been well summarized by Michael Burger, Executive Director at Columbia University’s Sabin Centre for Climate Change Law:

Each of the complaints presents the same simple, compelling storyline: These fossil fuel companies knew. They knew that climate change was happening, that fossil fuel production and use was causing it, and that continued fossil fuel production and use would only make it worse. They knew this, but they hid it. And then they lied about it, and paid other people to lie about it for them. All the while they profited from it, and plotted to profit more. Ultimately, their actions caused sea levels to rise, and thereby caused harm, are continuing to cause harm, and are contributing to future harm to the plaintiff governments and their residents. Accordingly, the complaints claim that the defendant companies should be held liable and forced to pay, both for the costs the local governments are incurring to adapt to sea level rise and for the companies’ own willful, deceptive, and malicious behavior.

While these are not the first climate change lawsuits to be filed in the United States, they are the first to expand the causes of action beyond the standard public nuisance action, to include negligence, failure to warn (a specific form of negligence), and design defect (plaintiffs are also suing in private nuisance and trespass).

The inclusion of these additional causes of action, coupled with the above-noted elements of knowledge and denial, have fueled comparisons to the tobacco litigation of previous decades, the influence of which is also manifest in the wording and structure of the various statements of claim.

In the table below, I have excerpted the opening paragraph of San Mateo’s statement of claim (right column) along with an excerpt from the U.S. Federal Court’s decision in United States v Philip Morris USA, Inc et al., 449 F Supp. 2d 1 (DDC 2006) (left column), in which the United States government was mostly successful in its action against the tobacco industry under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 USC §§ 1961-1968:

In addition to this narrative of knowledge and denial, it is the expanded list of potential causes of action, and the failure to warn especially, that have me thinking about the automobile industry.

The transportation sector as a major source of greenhouse gas emissions

The transportation sector is responsible for a significant portion of most developed countries’ greenhouse gas emissions and Canada is no exception. According to Environment Canada’s most recent assessment(2015), the transportation sector is responsible for roughly 24% of Canada’s emissions:

Of course, the transportation sector is not homogenous but rather consists of freight (air and truck), personal travel (aviation, bus, and rail) and personal vehicles, which Environment Canada has further – and usefully – subdivided between passenger light trucks and passenger cars:

Aside from the massive increase in emissions from freight trucks (a topic for a future post; in the meantime see here), what captured my attention is that the emissions from passenger cars have actually decreased since 1990, but emissions from passenger light trucks have significantly increased. According to Environment Canada,

Between 1990 and 2015, GHG emissions from the transportation sector grew by 42%. Part of this increase was due to a higher number of vehicles on the road and to changes in vehicle type used. Although total passenger emissions grew by 17%, emissions from cars declined by 23%, while emissions from light trucks (including trucks, vans and sport utility vehicles) doubled. (emphasis added)

As it turns out, this is entirely consistent with data showing that around 2006, sales of passenger class “cars” decreased while passenger class “trucks” sky-rocketed:

Car vs. truck sales (Canada, 1965-2016)

Figure by J. Carson with data from Statistics Canada:

In other words, in the decade during which scientific understanding of climate change advanced significantly, automobile manufacturers have been producing and selling  (and advertising) more and more emissions-intensive vehicles. 

Negligence, regulatory standards and the failure to warn

Under Canadian common law, in order to succeed in an action for negligence (including for a failure to warn), a plaintiff must establish the following five elements:

  • That the defendant owed the plaintiff a duty of care;
  • That the defendant breached the applicable standard of care;
  • That the plaintiff has suffered damage or harm;
  • That the defendant’s breach caused or contributed to the plaintiff’s damage;
  • That the plaintiff’s damages are not too remote or indirect.

With respect to the automobile industry, I can see potential actions both in negligence generally and for failure to warn. Because time and space do not permit a detailed consideration of each of the above elements, I have focused my analysis on the applicable standard of care. Consistent with the current suite of California lawsuits, I assume that the plaintiffs in such litigation would also be municipalities or perhaps state/provincial level governments that are incurring and will continue to incur costs because of climate change (I return to this issue and the duty of care briefly towards the end of this post).

With respect to negligence, and acknowledging at the outset its novelty, the argument would be that automobile manufacturers breached the applicable standard of care by selling – and continuing to sell – internal combustion engine (ICE) vehicles whose cumulative emissions create a reasonably foreseeable risk of harm to the plaintiffs by virtue of their contribution to anthropogenic climate change. Now, in response to such an argument, the industry would undoubtedly point to any applicable regulatory standards and their compliance therewith. In Canada, these standards are found in the Passenger Automobile and Light Truck Greenhouse Gas Emission RegulationsSOR/2010-201. While clearly relevant, Canadian law is also clear that mere compliance with regulatory standards is not determinative of liability in negligence. Perhaps the most authoritative statement on this front is the Supreme Court of Canada’s decision in Ryan v Victoria (City), [1999] 1 SCR 201, 1999 CanLII 706 (SCC) at paras 28-9:

[28] Conduct is negligent if it creates an objectively unreasonable risk of harm. To avoid liability, a person must exercise the standard of care that would be expected of an ordinary, reasonable and prudent person in the same circumstances. The measure of what is reasonable depends on the facts of each case, including the likelihood of a known or foreseeable harm, the gravity of that harm, and the burden or cost which would be incurred to prevent the injury. In addition, one may look to external indicators of reasonable conduct, such as custom, industry practice, and statutory or regulatory standards.

[29] Legislative standards are relevant to the common law standard of care, but the two are not necessarily co-extensiveThe fact that a statute prescribes or prohibits certain activities may constitute evidence of reasonable conduct in a given situation, but it does not extinguish the underlying obligation of reasonableness… Thus, a statutory breach does not automatically give rise to civil liability; it is merely some evidence of negligence…  By the same token, mere compliance with a statute does not, in and of itself, preclude a finding of civil liability… Statutory standards can, however, be highly relevant to the assessment of reasonable conduct in a particular case, and in fact may render reasonable an act or omission which would otherwise appear to be negligent. This allows courts to consider the legislative framework in which people and companies must operate, while at the same time recognizing that one cannot avoid the underlying obligation of reasonable care simply by discharging statutory duties. (emphasis added)

In Ryan, the Supreme Court went on to explain that the more detailed the statutory or regulatory standard, the more persuasive it will be in terms of benchmarking the common law standard of care (at para 40). But the Court also made clear that “the weight to be accorded to statutory compliance…depends on the nature of the statute and the circumstances of the case” (at para 39, emphasis added).

It is at this juncture that the automobile manufacturers’ letter to Scott Pruitt becomes relevant. Assuming that the EPA does try to water down emissions standards, would a court be entitled to take such facts into account (i.e. that a previous standard had been established but was subsequently weakened in what appears to be a classic example of regulatory capture), rendering such regulatory standards less persuasive in the standard of care analysis? As one of my students pointed out when we discussed the matter in my tort law class last week, doing so would seem to raise separation of powers concerns, a consideration explicitly noted by the Supreme Court in Ryan. As another student pointed out, however, it is not as though such a standard would be struck down (which is the domain of judicial review). The matter would be one of private liability at common law.

I suspect that the administrative record leading up to any such revised standards would fit within the rubric of “the circumstances of the case” (Ryan at para 39), but could not find any precedents on this point. In any event, in Ryan (as in previous cases), the Supreme Court of Canada was also clear that the persuasiveness of legislative standards also depends on their scope (at para 40), and it is here that an action for failure to warn warrants further consideration. Under Canadian law, there is “a clear duty owed by manufacturers, not only to make and design their products reasonably, but to warn about any dangerous aspects of their products. These warnings must be explicit and reasonably communicated” (Linden, Klar, Feldthusen, Canadian Tort Law: Cases and Materials, 14th ed, at 499).

Readers may be surprised to learn that, unlike many other countries, Canada does not require automobile manufacturers or car dealerships to place fuel efficiency labels on cars in the show room (i.e. doing so is voluntary). Setting aside for a moment that these labels speak to fuel efficiency and not the risks of climate change, anecdotally it appears that some dealerships will post the labels on their most efficient models, but often fail to place them on their trucks, SUVs, and sports cars. I have also begun to take note of the kinds of models placed at the front of various dealerships. My impressionistic answer? Trucks and SUVs.

This seems like a good time to return to the industry’s position that it cannot control customer tastes. According to Business Insider, Fiat Chrysler, Ford and General Motors were amongst the top 10 U.S. companies in terms of advertising spending in 2014, at $2.2 billion, $2.5 billion, and $3.1 billion, respectively. That seems like a lot of money to spend on something that the industry claims to not control. Moreover, recent analysis by the Sierra Club makes clear that only a fraction of this advertising is going towards ZEV models:

According to the data, Ford advertised its gasoline-powered Focus in about 4,750 instances on cable and broadcast TV to national audiences, whereas it only advertised its Focus Electric in about 200 instances to a national TV audience. That’s nearly 24 times more non-EV ad instances! Similarly, Mercedes advertised its C-Class gas guzzler in about 1,400 instances on national TV, whereas it didn’t advertise its B-Class electric vehicle at all to a national TV audience.

In my view, it is at least arguable that the automobile industry is – and has been for some time – in breach of its duty to warn consumers of the climate change risks associated with its ICE model vehicles, creating a reasonably foreseeable risk of harm to plaintiff municipalities. And while some readers may scoff at the suggestion that cars should come with climate change warning labels, consider the recently taken photograph of a PetroCanada gas pump below on the left (this photo is from Saskatoon, SK but I have seen them in Calgary as well):

The green label encourages customers to “play your part in helping to reduce climate change by using our products responsibly” and directs them to an industry website for more information. While I can only speculate, I suspect that such labels are a response to the efforts of Robert Shirkey at Our Horizon, who since 2013 has been advocating for the placement of climate change warning labels on gasoline pumps (such as the one above on the right).

In November of 2016, the municipality of North Vancouver became the first in Canada to pass a bylaw requiring such labels, although concerns have been expressed that the labels are not nearly as direct as they should be, having been “largely co-opted” by industry (for a summary of the research on warning labels, see this submission to the Canadian ZEV advisory panel).

To be clear, the challenges faced by the plaintiff municipalities in the California lawsuits are significant, as they would be in any lawsuit against automobile manufacturers. One of the biggest challenges insofar as negligence and failure to warn are concerned is that a duty of care (the first element discussed above) is usually owed to individuals (e.g. consumers of vehicles), not to municipalities or other levels of government. On the other hand, I would argue that once the cumulative and public nature of any given harm becomes apparent, as it did in this context long ago (and certainly since 2008, when the Village of Kivalina filed its suit against Exxon and others for having to relocate due to flooding), public institutions such as municipal governments become reasonably foreseeable plaintiffs.

I am also aware of recent announcements by various manufacturers of their plans to build out their electric fleets (see e.g. here). The question, in my view, is whether such plans are sufficiently ambitious in light of what we know (and have known for a couple of decades at least) about climate change. Going forward, the industry may wish to mitigate this risk by transitioning their fleets as quickly – if not as profitably – as possible, rather than obfuscating behind consumer tastes. In the meantime, the federal government’s ZEV advisory panel should seriously consider a ZEV mandate and mandatory climate change warning labels as two tools for increasing the uptake of ZEVs.

Editor’s Note

This article was first published on the blog of the University of Calgary Faculty of Law and is republished here with permission. Martin Olszynski (@molszyns) is Assistant Professor at the Faculty of Law at the University of Calgary.

See also his article, with Sharon Mascher and Meinhard Doelle, Tobacco and climate change liability: there are more similarities than you might think, published in May on Energy Post.

Original Post by Martin Olszynski

Martin holds a B. Sc. (Biology) and an LL.B., both from the University of Saskatchewan, and an LL.M. (specialization in environmental law) from the University of California at Berkeley. Following law school, Martin clerked for the Hon. Justice Denis Pelletier of the Federal Court of Appeal (2006). Prior to joining the University of Calgary, he was a part-time professor with the University of Ottawa Faculty of Law, where he taught environmental law.

The most common economic definition of negligence can be seen in operation in Judge Learned Hand’s famous opinion, U.S. v. Carroll Towing Co., 159 F.2d 169, 174 (2nd Circuit 1947).[3] The event that gave rise to the case were as follows: Several barges owned by the Connors Marine Co. were tied together off a busy Manhattan Pier. The defendant’s tug boat, “Carroll,” removed one of the lines connecting the barges to the pier. When the remaining lines broke, the barges were washed down-river and sank. No one was aboard the barges when they broke away, and the evidence indicated that had Connors’ barge operator (the “bargee”) been on board, the barges could have been saved. The question for the Court was whether Connors was liable for failing to have its “bargee” remain aboard. Judge Learned Hand wrote that Connor’s liability for the lost barge depended on:

(1) The probability that she will break away; (2) the gravity of the resulting injury, if she does; (3) the burden of adequate precautions. Possibly it serves to bring this notion into relief to state it in algebraic terms: if the probability be called P; the injury, L; and the burden, B; liability depends upon whether B is less than L multiplied by P: i.e., whether B less than PL.

A defendant is negligent if and only if B < PL.[4] This formulation of the negligence rule has come to be known as the Hand Formula. Judge Learned Hand went on to conclude that, taking into account the surrounding circumstances (there were strong winds, the harbor was busy, and the ship’s cargo valuable), the risk (PL) outweighed the burden of prevention (B). Consequently, he held Connors liable.[5]

Graphically, the Hand Formula looks like this:

The X-axis depicts the amount of care taken by the defendant. The Y-axis represents the cost in dollars — of taking precautions (line B) or of the expected loss resulting from failing to take precautions (line PL). The upward slope of line B indicates that the marginal cost of prevention increases as more care is taken. The downward slope of line PL indicates that the marginal expected cost of an accident declines as more care is taken.[6] The point at which the combined cost of precautions and accident are minimized is c*, the optimal level of care.

In determining what level of care the courts should require, two points should be kept in mind. First, courts should not merely examine the cost of the accident that occurs without taking into account the probability of such a loss occurring. Returning to our initial example, if my neighbor’s house catches on fire at the cost of $10,000, then my failure to take a precaution costing $9,999 will appear negligent if the court looks only at the loss that actually occurred.[7] Yet the expected cost of the accident was only $100. Unless the court considers both the probability of the loss and its magnitude, it will prescribe a level of care that above the optimal level, producing an inefficient result.

Second, the court must consider the marginal cost and benefits of additional precautions, not the total costs and benefits of all precautions. Suppose that spark-catching devices were prohibitively expensive, but an alternative set of precautions were available to me: I could paint my roof (or my neighbor’s roof) with fireproof paint — thereby reducing the expected cost of a spark accident from $100 to $10 — for a cost of only $30. A second coat of fireproof paint could reduce the expected cost of a spark accident to zero for another $30. If a court looked at the total cost and benefits of two coats of fireproof paint, the total precautions would appear efficient because the total cost ($60 of paint and labor) is less than the total benefit ($100 in reduced risk). However, if we separate the two decisions — the choice to apply a first coat and the choice to apply a second cost — it becomes apparent that the latter is inefficient; it provides only a $10 marginal benefit for a $30 marginal cost. The general point: courts concerned with economic efficiency should look at the marginal cost of each level of precaution.

[For two contemporary applications of the Hand Formula, see Judge Posner’s decisions in U. S. Fidelity & Guaranty Co. v. Plovidba, 683 F.2d 1022 (7th Cir 1982) (involving the reasonableness of boat owner’s unloading procedures resulting in the accidental death of a longshoreman) and McCarty v. Pheasant Run, Inc., 826 F.2d 1554 (7th Cir 1987) (involving the reasonableness of hotel security precautions where woman suffered beating and attempted rape)].

What action will the parties take if the court uses a negligence rule?[9] Assuming that the level of care required by the courts is equal to the optimal level of care, the defendant will naturally take the optimal level of care to avoid liability. What about the plaintiff? Will he become careless, knowing that the defendant must either take optimal precautions or pay for any injuries caused by his failure to do so? Probably not. Not all losses can be readily compensated with money. For example, no amount of money can offset the utility losses a plaintiff suffers from his own death. The loss of a loved one or the pain and suffering from bodily injury are other examples of non-compensable losses. In addition, plaintiffs are often risk averse with respect to relatively large losses and tend to prefer uniform levels of utility over time. A risk averse individual would prefer a constant utility of 10 over time to a utility of -5 (due to injury) in one period and a utility of 25 (including compensation for the previous injury) at a later time. For these reasons, in a negligence regime, plaintiffs, as well as defendants, are likely to continue to take care — although whether the level of care they take is optimal has yet to be determined.

So far, the negligence standard is looking pretty good from an economic perspective. On further reflection, however, negligence rules prove vulnerable to some serious economic criticisms. See Guido Calabresi & Jon Hirschoff’s Toward a Test for Strict Liability in Torts, 81 Yale L.J. 1055 (1972). Four are especially strong:

  1. The administrative costs of a negligence rule are higher than those of a strict liability rule. To apply a negligence rule, a court must first determine the level of care that would have been optimal under all of the circumstances, and then whether the parties met that level of care. To apply a strict liability rule, all a court must determine is whether or not the defendant caused the plaintiff’s injuries. The latter is much simpler — and thus cheaper — for the parties as well as the court.
  2. Another argument against the use of the negligence rule is that, because of the increased expense of bringing a suit, more plaintiffs will choose not to file suit. This could result in underdeterrence because the defendant will not bear the full cost of his risky activity. Suppose, for example, that a defendant’s factory pollutes a stream and causes a loss of $10 to be suffered by each of 100 residents who live down stream. The pollution can be prevented by a filter that costs $750. The total cost of the defendant’s activity is $1000. Plainly, installation of the filter would be efficient. Because PL exceeds B, a court applying a negligence standard would find the defendant liable for failure to install the filter. To avoid that liability, we would expect the defendant to engage in the socially optimal behavior — i.e., install the filter. However, what if the defendant knows that, if he continues to spill, only sixty percent of the residents can afford to bring suit? Under those circumstances, the defendant’s expected liability will be only $600. Paying that judgment would be cheaper than installing the filter. Consequently, he is likely to fail to take the optimal level of precautions.
  3. Courts may err in determining the level of proscribed care. If courts set the level of proscribed care too high (and force defendants to observe it, instead of allowing them to “punch and pay”), efficient activity will be deterred. If courts set the proscribed level of care too low, inefficient injuries will occur. For a detailed discussion of the problems of over- and underdeterrence, see Craswell, Deterrence and Uncertain Legal Standards 2 J. Law, Econ & Organization 279 (1986). The parties may also err in predicting the level of proscribed care that will be required by the courts. See Mark F. Grady’s A New Positive Economic Theory of Negligence, 92 Yale L.J. 799 (1983). Such errors by either the court or the parties will result in an inefficient outcome.
  4. Finally, a pure negligence rule may not address cases where the plaintiff is the least cost avoider of the accident. For example, if the plaintiff can avoid a loss of $10 by taking a precaution which costs only $2, and the defendant can prevent the same loss by taking a precaution that costs $9, we would prefer the plaintiff to take the $2 precaution rather than have the defendant take the relatively inefficient $9 precaution. This last problem can, however, be addressed through the use of a properly formulated contributory negligence doctrine. Question: will the contributory negligence doctrine currently in force in most American jurisdictions have this effect?

II. Strict Liability

Under a strict liability rule, the defendant pays for the injury his conduct causes the plaintiff regardless of whether the defendant was negligent. That is, the defendant pays for both negligent and non-negligent injuries. Famous cases employing strict liability rules include Rylands v. Fletcher, L.R. 3 H.L. 330 (1868), Ploof v. Putnam, 81 Vt. 471 (1908), Vincent v. Lake Erie Transp. Co., 109 Minn. 456 (1910) and Bolton v. Stone, 1 K.B. 201 (1950)[provide links to all].

As with a negligence rule, a defendant who is held strictly liable will take the optimal level of care to minimize his expenses. If a precaution costs less than the expected cost of the injury it will prevent (i.e., the cost of the injury times the probability it will occur), the defendant will take the precaution rather than pay for the injury. The defendant will not take an inefficient precaution, because if the cost of the precaution is more than the benefit it would provide in terms of injury prevention, it is cheaper for the defendant to pay for the resulting injury than to take the precaution. Thus under either a strict liability or a negligence rule, the defendant will take the optimal level of care.

One advantage of a strict liability rule — as mentioned above — is that it reduces administrative costs. The courts need not determine what level of care should be required of defendants nor whether defendants have met the prescribed level of care. A strict liability rule thus can produce an efficient result in a situation in which a court would be unable to determine what precautions should be taken by the parties. A strict liability rule also reduces litigation costs to parties and may encourage settlement of lawsuits by reducing uncertainty about probable judgements. The cost savings of each trial under a strict liability rule may be offset, however, by an increased number of suits brought. Thus it is not necessarily the case that a strict liability rule will always be cheaper to administer than a negligence rule.

A third advantage of a strict liability rule is what has been described as the “insurance function” of strict liability. Holding a company strictly liable for the injuries created by its products permits the company to spread risk to all the consumers who purchase the product. If a product will injure one consumer in a thousand, a strict liability rule will impose upon every consumer of the product 1/1000 of the resultant loss (in the form of slightly higher prices), rather throwing the burden entirely upon the person who is non-negligently injured. An ancillary benefit of such a regime is that the prices of products will fully reflect all of the costs associated with the harms the products cause, rather than only those costs due to the manufacturer’s negligence. The resultant pattern of product prices will encourage consumers to select safer products and avoid dangerous ones.

There are several potential arguments against the use of strict liability in torts:

  1. Strict liability has also been criticized on moral grounds by Richard Epstein in A Theory of Strict Liability, 2 J. Leg. Stud. 151 (1972) and Ronald Dworkin in Is Wealth Value?, 9 J. Leg. Stud. 191 (1980).
  2. Some economics have criticized strict-liability regimes on the ground that they will overdeter risky behavior. The risk of overdeterrence may be particularly strong in areas of new or developing technology. If companies bear the risk of all foreseeable and unforeseeable harms, they may be deterred from pursuing innovations whose risks are relatively unknown. This, in turn, may result in under-investment in new technology. For a more discussion of overdeterrence, see Richard Posner’s Strict Liability: A Comment, 2 J. Legal Stud. 205 (1973).
  3. Strict liability rules may also provide incentives for strategic behavior by plaintiffs. Consider the case of a farmer who knows a railroad will be held strictly liable for all livestock its trains run over. The farmer may let more of his livestock wander near the tracks rather than incur the expense of keeping them penned. In situations where both the plaintiff and the defendant should take care, a pure strict liability rule is inefficient. The danger of encouraging strategic behavior may be mitigated by risk aversion on the part of the plaintiff, especially if the plaintiff may suffer physical injury. In addition, a comparative or contributory negligence rule, used in conjunction with a strict-liability standard, can largely remove the incentive for strategic behavior — although it will also increase the costs of administering the regime.
    Finally, strict liability rules may have regressive effects in practice. When the victim of a non-negligent injury receives compensation under a strict liability rule, the cost of the liability award typically is borne ultimately by two groups: those who must pay a higher price for the product and those who can no longer afford the product and must chose substitute goods. The increase in the price of a product due to strict liability is borne equally by all those who use the product regardless of their income. A fixed increase in the price of a product affects people with low incomes disproportionately more than it does people with higher incomes. For this reason the “price effect” of strict liability is sometimes considered a regressive tax.

III. The Effects of Liability Rules on Activity Levels

The probability that an injury of a particular sort will occur is affected, not just by the degrees of care exercised by defendants and plaintiffs, but also by the frequency with which they engage in their respective behaviors. For example, the likelihood that a hiker will be shot by a hunter is affected, not just by hunters’ care in shooting and hikers’ willingness to wear orange vests, but also by the frequency with which hunters hunt and hikers hike during hunting season. In principle, there is no reason why courts should not consider activity levels of plaintiffs and defendants when assessing the reasonableness of their conduct — i.e., when applying a negligence or contributory negligence standard. In practice, however, courts rarely do so — largely because they are unable to determine the optimal level of any activity.

Even though, in general, the courts do not examine the activity levels of parties, the standard of liability they select will indirectly affect those activity levels. Suppose, to illustrate the point, that cars and 18-wheel trucks sometimes collide at intersections (perhaps because of bad weather or mechanical defects) even though the drivers of both vehicles take optimal precautions and that in such collisions only the cars (and their drivers) are injured. If a negligence standard is used to determine liability arising out of such collisions, both car and truck drivers will of course have an incentive to take optimal care — to observe speed limits, watch for other vehicles, stop at stop signs, etc. In such a system, risk averse car drivers will also have an incentive to reduce their activity levels — i.e., to drive less in hopes of avoiding uncompensated (because nonnegligent) injuries. Under a negligence rule, truck drivers, however, will have an incentive to maintain high activity levels even when, from a social-welfare standpoint, those levels are inefficient. Knowing that they can escape liability altogether by taking the prescribed level of care, the truck drivers will continue driving as long as the marginal benefits of additional trips exceeds their marginal costs — excluding the costs associated with the resultant injuries.[10]

A strict liability rule, by contrast, will discourage excessive activity levels by truck drivers. Forced to pay for all injuries they “cause,” they will decline to take trips whenever the resultant savings (in terms of decreased liability) outweighs the potential profit. However, risk averse truck drivers may reduce their activity levels more than is socially desirable. Under a strict liability rule, on the other hand, car drivers may drive more than optimal amounts. Knowing that the truck drivers will have to pay for all injuries, they may undertake socially wasteful trips. However, this effect is likely to be mitigated by car drivers’ desire to avoid pain and other non-compensable losses.

The care and activity level effects of various rules are summarized on the following table:


Is There An
Level of:
No Liability Strict Liability Negligence  Strict Liability
with Contributory
Care by
Truck Driver?
Truck Activity?  . .
Care by Car Driver? . .
Car Activity? . .

Note that a “no liability rule” operates as a strict liability rule pointed against the plaintiff rather than the defendant.

The general lesson on this comparison is that — from the standpoint of activity-level effects — whether a negligence standard or a strict-liability standard would be better depends on (a) the relative risk aversion of the parties and (b) who is most likely to be the best activity-level modulator. If defendants can best adjust the level of their activities, we might wish to use a strict liability rule. If plaintiffs are the best activity-level modulators, we would tend to prefer a negligence rule. For further discussion of the effects of legal rules on care and activity levels in unilateral and bilateral accidents, see Steven Shavall’s Strict Liability versus Negligence 9 J. Legal Stud. 1, 2-3 (1980).