Liability Standards Research Articles

Liability of commercial and social hosts for alcohol-related injuries: a national survey of accountability norms and judgments.

Legal standards for liability of commercial sellers and social providers of alcoholic beverages are affected by social norms concerning accountability and responsibility. Using a nationwide probability sample telephone survey of 7,021 U.S. residents, we conducted a randomized experiment in which each subject was asked to respond to multiple vignettes. The vignettes told stories of drinking situations, systematically varying dimensions concerning age of drinker, commercial versus social settings, amount of alcohol consumed, history of previous behavior, and seriousness of damage or injury following drinking. Analyses involved linear mixed (i.e., random effects) model regressions, using responses to vignettes as the outcome variable, controlling for a series of sociodemographic, behavioral, and attitudinal measures. Results showed that age of drinker (young), setting (bar), and previous behavior (history of irresponsibility) were most strongly associated with harsher judgments of civil liability. Citizens' multiple standards for assigning legal liability and implications for public policy are discussed.

Summary of Roundtable Discussions regarding the Future Content of the U.S. Securities Laws

JAMES D. COX [*] EDWARD F. GREENE [**] On April 8-9, 1999, more than sixty securities lawyers, regulators, and academics participated in a roundtable discussion in Washington, D.C., on what should be the future content of the U.S. securities laws. The full participant list (excluding, however, SEC personnel) appears in the Appendix of this report. The conference's co-conveners were Mr. Edward F. Greene of Cleary, Gottlieb, Steen & Hamilton, and Professor James D. Cox of the Duke University School of Law. Our purpose was to see if a consensus could be forged regarding the direction the reform of the U.S. securities laws might take. Coincidentally, the SEC had extended the original comment period for its Aircraft Carrier release [1] to June 30, 1999. With the extended comment period, we were able to discuss many aspects of the reform proposals embodied in the Aircraft Carrier Release. The program was organized around the following six topics: 1. The Changing Regulatory Premises 2. Revamping the Disclosure and Offering Process 3. What Gets Regulated and Exempted 4. Regulatory Strategies to Address Internationalization 5. Liability Standards for a Company Disclosure System 6. The Regulation of Exchanges and Alternative Trading Systems We offer below a summary of what we believe to be the central beliefs, conclusions, and approaches expressed at the meeting. Knowing that our collective memories could never accurately replicate the conference's discussions, we commissioned a court reporter to transcribe the conference's commentary. We then reviewed the resulting 419 page transcript to prepare this report. Because we assured each participant that no remarks would be attributed to any individual, no one is mentioned in our report. Instead, what follows is our synthesis of a highly stimulating and thoughtful day-and-a-half debate on the future content of the U.S. securities laws. A threshold issue we considered is the scope of the SEC's power to implement reform pursuant to its exemptive authority under Section 28 of the Securities Act of 1933. [2] On the one hand, there was a consensus that the SEC could not use this authority to swallow up the Act, such as by exempting all offerings of an issuer, if the effect were to eliminate the responsibilities of the issuer or its directors under Section 11 of the Act. On the other hand, there was recognition that the SEC now enjoys broad authority to reduce the regulatory reach of Section 5, such as by narrowing the current definition of an offer to sell, by modifying the content requirements of the registration statement, by delineating what constitutes delivery of a prospectus, and by expanding the contours of the private placement exemption to permit the deregulation of the offering process and more liquidity with respect to restricted securities. There was no sentiment for scrapping the current statutory framework of the U.S. securities laws. There was also a consensus that legislative action is both unnecessary and undesirable; any necessary reform can and should occur within the present statutory framework using the broad rulemaking and exemptive authority the Commission currently possesses. The analogy invoked in our discussion was a need to locate and repair potholes in the road, rather than constructing a new freeway that will pass through unfamiliar terrain. The strongest sentiment for maintaining the status quo was expressed for initial public offerings for which registration and review by the SEC's staff was not questioned. However, for all types of registrants, the conference participants believed there is a need to rethink the current prospectus delivery requirements, a point discussed below. A registration statement should continue to be the regulatory cornerstone for public offerings by any issuer. However, the disclosure requirements for any registration statement should not be thought of as embodying all the information an investor should have in order to reach an informed decision to purchase the registrant's security; mandatory disclosure should focus upon those items of information uniquely known to the issuer. …

Deconstructing Section 11: Public Offering Liability in a Continuous Disclosure Environment

DONALD C. LANGEVOORT [*] I INTRODUCTION Shortly after the Securities Act of 1933 [1] (1933 Act) became law, critics from the securities industry charged that the civil liability provisions created by Section 11 of the Act made it excessively draconian. Mandatory disclosure and prospectus delivery, even pre-clearance by a federal agency, were troublesome enough. However, strict liability to investors for issuers, and failure of liability for underwriters, accountants, officers, and directors for material misstatements in a registration statement, were quite another matter--making Section 11 the bete noire, in Louis Loss's words, of the legislative scheme. [2] Opponents ominously warned that the legislation would dry up American capital-raising. [3] Even though they were eventually proven wrong in that particular prediction, [4] the industry was right to see the threat of private civil liability as the engine that drives the 1933 Act. [5] Estimates in the finance literature suggest, for example, that a sizable portion of the unde rwriters' spread is a liability risk premium, [6] and lawyer-disseminated fear of liability casts a harsh shadow over the due diligence process. [7] In the late 1970s and early 1980s, concerns about the relationship between liability and capital-raising efficacy reappeared. Large, seasoned issuers were moving significant capital-raising transactions offshore, into the so-called Eurodollar market. Delays associated with the Securities and Exchange Commission (SEC) review and limits on publicity and marketing of domestic offerings were blamed. In response, the SEC introduced registration for large capitalization issuers via Form S-3 and modernized and expanded the availability of shelf registration, thereby permitting large issuers to move quickly to take advantage of market opportunities without excessive regulatory delays. [8] In the political process and in academic debates, however, the principal risk associated with speeding up the distribution process was readily identified. Disclosure quality is threatened by the de facto loss of opportunity for external due diligence by underwriters and others associated with the issuance from the ti me the decision to sell is made to the time securities are purchased by investors. [9] Underwriters thus found themselves in a world of de jure liability if there were misstatements or omissions; only a vague Commission rule, coupled with some informal suggestions for ex ante due as protection, seemed to suggest a more permissive standard of due diligence in such settings. [10] Today, few suggest that we should, or can, backtrack on liberalization of the 1933 Act. [11] Instead, regulatory efforts all point to the opposite: further expansion of the speed and limited disclosure responsibilities associated with large company capital-raising. [12] Yet, this simply focuses all the more attention on liability, and to this point, the Commission has suggested only minimal reform: clarifying the due diligence responsibilities associated with short-form offerings to take account of practicability concerns. Indeed, to the consternation of many, the Commission suggested expanding the kinds of issuer-generated information that would otherwise be subject to negligence-based civil liability under the 1933 Act. [13] This article is an effort to rethink civil liability in capital-raising transactions by large capitalization issuers. [14] After a brief digression about who should set liability standards, the article then addresses two related questions. The first deals with a natural question: Should not the primary regulatory effort for large issuers be to assure continuous disclosure in the secondary marketplace, given the far larger volume of such trading in that market compared to that in primary transactions? [15] Second, if we have developed a satisfactory regime of disclosure responsibilities for this setting, what more, if anything, in terms of liability protection, is needed when such issuers sell new stock into an existing market for their securities? …

Internationalization of Primary Public Securities Markets

HAL S. SCOTT [*] I INTRODUCTION In fully internationalized securities markets, issuers in public primary markets should be able to issue securities to investors worldwide using one set of optimal distribution procedures and disclosure documents, and subject to one set of liability standards and enforcement remedies. Rules in which the benefits outweigh the costs are optimal. Optimal standardized issuance (OSI) across borders would reduce the costs of issuing securities that are in international demand, a benefit that would be shared by both issuers and investors. Also, OSI would result in more perfect competition in the issuing market for such securities (just as in the goods market) and a more efficient allocation of capital worldwide. OSI is only relevant when there is sufficient investor demand for a public international distribution. This article is concerned only with those cases. The significant growth of registered offerings of foreign issuers in the United States, from seventy-eight in 1990 to 526 (with a total value of $145.9 bi llion) in 1998, is a strong indication of such investor demand. [1] This article focuses on public primary markets rather than public secondary markets. While the two markets are related--publicly distributed securities are invariably listed and traded in public secondary markets--they are not the same. Public securities are initially distributed through an underwriting process where securities are sold to investors by the issuer through underwriters; thereafter, the securities are traded in the secondary market. Primary market distributions play a crucial part in the allocation of capital. Investors purchasing in primary markets, as opposed to secondary markets, cannot necessarily rely on prices set in deep liquid markets where rational expectations of the value of the securities have been incorporated into the price. [2] Additionally, public primary markets involve purchases by individual investors; indeed, issuers make such distributions in order to reach these investors. While initial public offerings (IPOs)--an important part of the public primary market--are heavily dominated by institutional investors, individual investors participate significantly in these markets, as well. This article assumes that there is no conflict between having standardized and optimal disclosure rules. Merritt Fox, to justify his issuer nationality approach, argues to the contrary when he raises the possibility that the socially optimal level of disclosure may differ for different countries. [3] He argues, in effect, that the optimal level of disclosure in Germany and Japan, where capital has been traditionally allocated mainly through banking markets, may be lower than in the United States, where securities markets have played a more important role. [4] However, in major markets, including Germany and Japan, securities markets currently play an important enough role that those countries care about how they allocate capital. Securities markets in these countries, as compared to banking markets, are gaining importance. Further, even if one should be more tolerant of less disclosure in Germany, such a rule would only affect allocation of capital within Germany. Such tolerance would not be appropriate in a n international context where the concern is with allocation among issuers of different countries. If Deutsche Telekom raises significant capital outside Germany, we should be concerned with choosing the right set of rules for the world, not just Germany. Part II of this article discusses the current obstacles to achieving OSI. It argues that the imposition of U.S. rules for disclosure, distribution, and enforcement, within and to some extent outside the United States, impedes the achievement of OSI. It also argues that the solution is not merely to abolish mandated disclosure. The article then proceeds to examine options for dealing with the problem. …

Pre-Trial Settlement and the Value of Audits

This paper studies the impact of liability rules and damage awards on audit effort and the value of an audit (the net benefits to society of an audit) when an auditor and an investor may settle before proceeding to trial. It is demonstrated that audit effort increases with size of the damage award, but may decrease with the rigor of the auditing standards. For a given level of damage award, allowing pre-trial settlements may reduce the value of the audit despite the reduction in the deadweight legal costs. On the other hand, if the damage award is optimally chosen, then allowing settlements increases social welfare. With an appropriately set damage award, strict liability standards result in the first-best outcome, while the first-best result cannot be obtained with vague negligence rules.

The Scope of Private Securities Litigation: In Search of Liability Standards for Secondary Defendants

outside professionals should be held liable as primary violators under section 10(b) of the Securities Exchange Act. In keeping with the Court's current interpretive methodology, Central Bank and its progeny employ a textualist approach. In this Article, Professor Fisch argues that literal textualism is an inappropriate approach for interpreting the federal securities laws generally and misguided in light of legislative developments post-dating the Central Bank decision. Instead, Professor Fisch advocates an approach that weighs Congress's recent endorsement of liability for outside professionals against the potential for litigation abuses perceived by the Central Bank Court. The Article concludes that recent federal decisions have been unduly restrictive in their interpretation of section 10(b) liability, and suggests that courts give greater consideration to the nature of the professional-client relationship and the role of liability in furthering the integrity of the securities markets.

The Learned Intermediary Doctrine and Patient Package Inserts: A Balanced Approach to Preventing Drug-Related Injury

In this note, Catherine Paytash examines the validity of the learned intermediary doctrine as it is applied in the context of prescription drug therapy. She explores and analyzes the rationales advanced to support the rule and the criticisms that have been leveled against its application to prescription drugs. Paytash identifies two roles that the learned intermediary doctrine is intended to play in relation to prescription drugs: 1) a role that provides a reasonable and efficient legal system of warning about side effects and appropriate use, and 2) a role that encompasses a system for informing patients. Paytash concludes that the learned intermediary doctrine, though justified as a legal standard of liability for warnings provided by prescription drug manufacturers, is inadequate as a system for informing patients about the prescription medications they use. She proposes that the most efficient way of preventing prescription drug related injury is a hybrid solution comprised of the learned intermediary doctrine as the legal standard for liability for product warnings and an FDA-mandated system of patient package inserts as a supplemental means of providing prescription drug users with information.

Courts and the Tort-Contract Boundary in Product Liability

In this Article I address the appropriate source of liability in cases of injury between parties with a pre-injury contractual relationship. This applies to product liability (for direct purchasers, not for injured third parties) and also to medical malpractice. Since the parties do have a pre-injury relationship, they could contract ex ante for damages and liability standards through warranties and disclaimers; if they did so, then they would probably choose standards so that many fewer cases would be filed. The current legal system, behaving consistently with arguments made by Atiyah and Gilmore, instead treats these injuries as torts and handles them through product liability, leading to many additional cases. This means that consumers and producers are forced to accept the terms imposed by the courts, and there is no room for variation. The literature arguing for contractual treatments of such injuries is voluminous as is the literature arguing for the now traditional treatment as a tort, a very small sample of which is discussed below.

The role of interest groups in products liability law

Describes the impact of recent changes in US tort law and identifies four interest groups concerned: manufacturers, insurance companies, consumers and lawyers. Discusses their relative strengths, motivations and influence on judicial decisions, citing relevant liability cases for product‐related injuries due to manufacturing defects, design defects and inadequate warnings. Develops a logistic regression model to relate state adoption of strict liability standards to the relative strength of interest groups and applies it to US data. Suggests that the strength of manufacturers and, more particularly, lawyers is significant; and that liberal states are more likely to adopt strict liability for design defects. Calls for further research on the role of the legal profession in legal change.

How Safe is "Safe"? The Brave New World of Differential Cleanup Standards

The development of environmental liability standards for the cleanup of contaminated sites; answers to the question, "how clean is clean?"; modification of early objectives leading to the question "how safe is safe?" and the new focus on how properly to limit, rather than expand, liability; a review of efforts to develop "differential" cleanup standards in the U.S. Environmental Protection Agency's Region III, and in the states of Massachusetts, Texas, Pennsylvania and Illinois.

Title VII. Sexual Harassment. Seventh Circuit Adopts Employer Liability Standards for Sexual Harassment by Supervisory Employees. Jansen v. Packaging Corp. of America, 123 F.3d 490 (7th Cir. 1997) (En banc), Cert. Granted, 118 S. Ct. 876 (1998)

Title VII. Sexual Harassment. Seventh Circuit Adopts Employer Liability Standards for Sexual Harassment by Supervisory Employees. Jansen v. Packaging Corp. of America, 123 F.3d 490 (7th Cir. 1997) (En banc), Cert. Granted, 118 S. Ct. 876 (1998)

Power Reliability and Quality Adds Power Value

It is estimated that $27 billion dollars was lost as a result of power mishaps during 1996. Within the industry, there is little agreement on the effect that electric power industry restructuring will have on the future reliability and quality of the system. However, many engineering experts are concerned that the number of mishaps will increase as the electric power industry becomes more competitive because (1) power will travel over longer distances to reach the customer, (2) increased system impedance will make it more susceptible to sags from faults, (3) power suppliers will have less incentive to resolve system problems cooperatively, (4) price cutting pressures will result in decreased system maintenance and (5) more breakdowns will result from antiquated, and ill-maintained, end-user equipment. The 1996 western states outages prompted an immediate focus on reliability issues. Moreover, power suppliers and end-users are beginning to become more aware of the serious legal implications posed by problems in power reliability and quality, as the traditional utility gross negligence liability standards begin to be replaced by breach of contract, negligence and, perhaps, strict liability standards. This has resulted in new interest in power reliability and quality in power contract negotiations, loss control and maintenance,more » and reviews and audits of insurance requirements.« less

A Cosmopolitan Court for Transnational Corporate Wrongdoing: Why Its Time Has Come

In the absence of any institution for imposing legal liability on global business, the idea of instituting a cosmopolitan court for international corporate offenses is advocated. The proposal is then critically examined and defended in light of a number of key objections. Having both civil and criminal jurisdiction, such a tribunal could benefit domestic and international legal systems, multinational corporations, and victims of transnational and international corporate misdeeds. By laying down minimal global standards of corporate liability, resolving conflicts between the regulatory activities of national legal systems, and affording redress for aggrieved parties in countries with inadequate legal infrastructures, the tribunal would promote the objectives of compensatory, distributive, procedural and retributive justice at the global level. Moreover, the court would assist corporations by translating compliance with minimum ethical standards to the bottom line. Ethical corporations will gain competitive advantage relative to unscrupulous firms, since the latter'ss activities will be sanctioned. The international community need not leave obedience to basic norms up to the voluntary good-will and discretion of multinational firms.

An approach to expedite the cleanup of contaminated property and reduce associated claims litigation

The equitable allocation of remedial response costs is the central objective of much litigation involving the cleanup of contaminated property. In reality, this objective is seldom achieved and with the strict, joint and several liability standards in CERCLA, response costs are often distributed to present owners, even though they may have no connection to historic chemical releases on the property. A recent shift in California regulatory policy is intended to expedite privately funded cleanups and reduce the transaction costs typically associated with multi‐party efforts. Sites designated for these reforms are subject to an alternative liability scheme, reduced levels of regulatory oversight, and a simplified investigative and remedial process. Through the early identification of all parties associated with the site, the parties may resolve disputes and allocate responsibility through a mediation process with the agency. De minimis settlements, contribution protection, and government funding for any orphan shares in allocated costs are also available to the parties. Beyond expediting the cleanup process, these reforms are intended to encourage the early participation of potentially responsible parties so that remedial and cost allocation issues are resolved during the investigation and cleanup, thereby reducing the need for subsequent claims litigation.

Republicans cool to Superfund reforms

The Clinton Administration1 s recently released Superfund legislative reform principles (C&EN, May 12, page 23), and Vice President Al Gore's subsequent announcement of a $300 million Brownfields National Partnership Agenda have not made much of an impression on Capitol Hill. Although the Administration says it is firmly behind comprehensive reform of the nation's hazardous waste law, there has vet to be a meeting of the minds between the Administration and congressional Republicans on a number of issues, including liability standards and state involvement. EPA Administrator Carol M. Browner says the reforms the Administration would like to see in any Superfund rewrite amount to commonsense principles . . . to make Superfund work faster, fairer, and more efficiently. And virtually everyone on both sides of the aisle agrees that reform is needed. However, there is precious little new in the Administration's principles and most restate previously held positions. For example, the Administration wants leg...

Science, Politics, and the Evolution of Law and Neoclassical Economics

James Hackney's article provocatively points our attention to very important and underexplored issues concerning the interplay of science and politics in the dramatic evolution of law and neoclassical economics since the Second World War. At the heart of his article is his rejection of any reductionist interpretation of the leading developments in this area. Modern law and neoclassical economics, he argues, cannot be accurately viewed either as merely a faithful, nonpoliticized application of modern social science or, alternatively, as simply a convenient vehicle for the promotion of particular contentious political beliefs. Hackney insists that law and neoclassical economics, both in general and in the specific doctrinal area he emphasizes, is about both science and politics. His article seeks to demonstrate this duality and, more broadly, to clarify the general nature and evolution of modern law and economics. Hackney highlights key general characteristics of twentieth-century intellectual thought and examines the influence of those characteristics, as well as the interplay between science and politics, in a series of landmark works on law and economics that have great relevance to recent debates over appropriate products liability standards.

Law, Economics, and Inefficient Norms

t Assistant Professor, University of Pennsylvania Law School. My thanks to Matthew Adler, Lisa Bernstein, David Charny, Robert Ellickson, John Lott, Reed Shuldiner, participants at the Symposium on Law, Economics & Norms at the University of Pennsylvania Law School, and participants at a workshop at the University of Toronto Law School. 'See ROBERT C. ELLICKSON, ORDER WITHOUT LAW: How NEIGHBORS SETrLE DISPUTES 167-83 (1991); Robert C. Ellickson, Property in Land, 102 YALE L.J. 1315, 1320-21 (1993). 2 See, e.g., ELLICKSON, supra note 1, at 283 (arguing that the law should defer to group norms for everyday disputes between members); Lisa Bernstein, Merchant Law in a Merchant Court: Rethinking the Code's Search for Immanent Business Norms, 144 U. PA. L. REV. 1765, 1770 (1996) (stating that 'transactors do not necessarily want the relationship-preserving norms they follow in performing contracts and cooperatively resolving disputes among themselves to be used by third-party neutrals to decide [their] cases (footnote omitted)); Robert D. Cooter, Decentralized Law for a Complex Economy: The Structural Approach to Adjudicating the New Law Merchant, 144 U. PA. L. REV. 1643, 1650 (1996) [hereinafter Cooter, Decentralized Law] (stating conditions under which law should defer to norms); Robert D. Cooter, Structural Adjudication and the New Law Merchant: A Model of Decentralized Law, 14 INT'L REV. L. & ECON. 215, 226-27 (1994) (same); Richard A. Epstein, International News Service v. Associated Press: Custom and Law As Sources of Property Rights in News, 78 VA. L. REV. 85, 85 (1992) [hereinafter Epstein, Custom in Property] ('The state's chief function is to discover and reflect accurately what the community has customarily regarded as binding social rules and then to enforce those rules in specific controversies.); Richard A. Epstein, The Path to The T.J. Hooper: The Theoiy and History of Custom in the Law of Tort, 21 J. LEGAL STUD. 3, 4 (1992) [hereinafter Epstein, Custom in Torts] (arguing that where the standard of liability is negligence, courts should regard custom as conclusive evidence of due care); Jason S. Johnston, The Statute of Frauds and Business Norms: A Testable Game-Theoretic Model, 144 U. PA. L. REV. 1859, 1863-64 (1996) (discussing the Statute of Frauds and the circumstances in which this formality is or is not needed).

Community standards of criminal liability and the insanity defense.

Two experiments (N=71) compare lay standards of insanity to standards incorporated in American legal codes. In Experiment 1, case vignettes provided only legally relevant information about defendants' degrees of impairment in cognition or in behavioral control. Respondents' judgments of criminal liability ornot guilty by reason of insanity (NGRI) reflected an exculpatory standard of substantial impairment in both cognition and control. In Experiment 2, case vignettes provided realistic information about defendants' psychiatric diagnoses; respondents had to infer levels of cognitive and control impairment. Results showed that respondents made highly idiosyncratic inferences based on diagnostic categories, but once made, these inferences predicted NGRI judgments. Implications of the concordance between laypeople's rules for assigning NGRI verdicts and the rules used in American legal codes are discussed.

Nibbling on the Chancellor's Toesies: A "Roguish" Concurrence with Professor Baxter

The Office of Thrift Supervision of the Department of the Treasury (OTS),1 successor to the now defunct Federal Home Loan Bank Board,2 regulator of thrift institutions3 and their holding companies,4 and the principal villain of this piece, has been at the forefront in advocating the broadest and most far-reaching standards of professional liability. These standards, which affect not only officers and directors but also accountants and attorneys, are not established in any case law. They are articulated principally in speeches given by OTS officials, especially those of its former Chief Counsel, Harris Weinstein. Nevertheless, a firm understanding of the agency's views is important to academics and practitioners alike in view of the escalation of administrative enforcement activity against lawyers and law firms.5

Hypochlorites: a review of the evidence.

A literature review exploring the advice available to practitioners on treating necrotic and sloughy wounds with hypochlorites, with a guide to decision-making based on the standard of liability in English civil law.