The Perverse Incentives of Tort Reform and Liability Caps -- Good intentions gone awry.

As a practicing attorney, I've seen firsthand the results of negligence on the lives of victims--lives destroyed by the carelessness of others.

When I hear that BP and other large corporations push for liability caps, I practically cringe at the perverse incentives of restricting damage awards.

When a tortfeasor knows they escape paying the full cost of the damages they visit on innocent victims, where's the incentive to maximize safety of their activities?  

To the contrary, liability limits encourages maximization of activities leading to liability.  

For example, if the law suddenly limited the penalty for robbing a bank to an overnight stay in jail, regardless of the amount of money stolen or injuries caused, then more bank robberies would occur.  It's real simple.  

By creating liability caps, we give corporations a license to engage in bad behavior.  We don't allow our children to behave this way, so why do we let companies?  What message does that send about our priorities?

Let's use an analogy:


When disciplining your child, you have a range of options, viz., corporal (spanking), grounding, and privilege withdrawal.

These punishments offer the full range of disciplinary choices. Their impact comes, not from using all of them, but in the uncertainty of which one will be applied.


Now, lets say your spouse hates spanking and he/she successfully dissuades you from spanking--what result?  

The child knows for certain that any misbehavior results in only grounding or loss of privileges.

Similarly, with liability caps large tortfeasors gain the certainty of knowing the maximum cost of misbehavior.  They can calculate the potential cost; they can now maximize their bad actions, knowing they will not pay the full consequences.  


Unfortunately, those costs just don't disappear.  They must go somewhere.  They get pushed onto the innocent who are damaged by these large entities.


Back to our analogy:  Say your child enjoys staying in their room.  

In that case, grounding offers little punitive effect, since grounding equates to an enjoyed activity.  

Your punishment options dwindled to one: Privilege removal.

If a child knows they only risk one punishment for misbehavior, irrespective of how bad that misbehavior may be, and that punishment is privilege loss, then where's the incentive to behave?

Likewise, capping liability awards, by law eliminates any incentive for corporate actors to behave in a socially responsible manner?

In fact, capping liability incentive-izes bad behavior.  These entities rationally increase liability-inducing actions to offset their sum-certain liability?


Liability caps and liability limits do nothing but reduce the free market. Liability serves to place the costs of doing business onto the party actually incurring them. 

We discourage our children from becoming criminals through discipline.  Why would we, as a society, encourage corporations to ignore safety and push the costs of making profits onto the innocent and least capable of bearing those costs?

By limiting liability and by imposing liability caps, that is exactly what we do? 

Calling Bullsh*t on British Petroleum's attempt to shelter its profits behind Independent Business owners.

Many independent sellers of BP products are crying foul over the dramatic drop in business they are suffering due to the public relations disaster that is "The BP Gulf Oil Spill."

The common refrain:  Boycotting small gas stations that happen to sell BP gas is really only "hurting the independent small business owner."

I call BULLSHIT! on that.

Here's why:

The small business owners made rational economic decisions to align themselves with and to sell BP products.  Do they get only the benefits of the relationship, but none of the consequences?  What fantasy world are they living in?!  When you sign a franchise deal you take the good with the bad--simple business 101.


If BP is a popular brand, then these small business owners accrue the benefits of reflected glory by using the BP trademarks to advertise their businesses.  These businesses gain added revenue by selling other non-BP items to customers attracted to the BP brand.  

In grown-up business language it's called: Win-Win-Win --for BP, Independent Business owner, and customers.


Now, when the proverbial shit hits the fan and BP despoils its reputation, these independent businesses want to throw themselves on the mercy of the buying public's conscience for the "small business owner."  

Frequently, I hear these guys bellyache that "they didn't cause the spill and shouldn't be punished for BP's malfeasance."


Again, BULLSHIT!


These small business owners made rational economic decisions to franchise with BP.  Contractual relationships are like marriages--you take the good with the bad.


If consumers want to punish BP, the only way they can do so is with their wallets.  Just because these small business owners made a bad choice in selecting BP, it doesn't mean the rest of the buying public has to bail them out; their whining is just that.


The real problem here is BP.  If these small business owners want to complain about their loss of income, they should take it up with British Petroleum--not with those of us who want to take our business elsewhere.


These are the consequences of business decisions--small business owners need to grow up and live with the choices they make instead of expecting America to bail them out.