Toxic Torts by Government
January 1, 1996
by Bruce L. Benson

For years now, the news media has been filled with stories about lawsuits filed by large groups of people exposed to toxic substances, the most common being asbestos and Agent Orange, the defoliant used in Vietnam. Much of the comment on those cases has implied that private firms routinely and often with impunity create health hazards for workers and users of their products. In other words, “market failure” creates health risks and the government must be called in via the court system to correct a tragic situation.

Economist Bruce L. Benson argues that, on the contrary, the explosion of toxic tort litigation is largely the result of government failure. Toxic Torts by Government demonstrates that all the costs associated with this problem—including avoidance of future exposure, cleanup, and dispute resolution—are magnified by the failures of government.

Benson looks at two broad problems. First, he takes up the implications of the fact that the government is a major user of toxic products and therefore a key producer of toxic waste. That often makes it, Benson writes, “the most proximate cause of whatever toxic harms may actually exist.” Second, he shows that the toxic tort problem is aggravated, if not created, because government often changes the legal rules. What’s more, the rules can vary from jurisdiction to jurisdiction. Because of the resulting uncertainty, potential litigants can easily find opportunities to get their hands on other people’s wealth. As a result, a manufacturer’s right to income he produces is less secure than it used to be. Crowded courts raise everyone’s costs.

For all the aspersion cast on private manufacturers of toxic substances, the government apparently is the biggest single user of them. Agencies of the state “use large quantities of allegedly toxic products in ways that put people at risk, often without warning the parties at risk or even acknowledging the risk,” writes Benson. Despite that, the government is frequently immune from legal liability. And even in cases where it can be sued, the officials who make the decisions are not personally liable. The taxpayers pay any damages. “This immunity,” Benson writes, “means that government decision makers have relatively weak incentives to warn others about the hazards that government activities are creating, thereby perhaps actually increasing the exposure to potential toxic substances, and the level of health damages and/or deaths that follow.” Of course, when people can’t sue the government, they are more likely to sue the government’s suppliers, if possible.

Benson provides a detailed account of the Agent Orange story to illustrate his point. Agent Orange comprises two powerful herbicides and was used by U.S. forces in the jungles of Vietnam beginning in 1965. This was not a case of unknown dangers. Top army people knew of the potential hazard of one of Agent Orange’s components more than a decade earlier, thanks to a manufacturer, the Monsanto Chemical Company. “Indeed, the army knew as much, and probably more, about the potential dangers of these herbicides as any company that manufactured them,” Benson writes. The President’s Science Advisory Committee was informed of the potential for harm by the army in 1963. The National Cancer Institute commissioned research in 1965 and was informed a year later that, at least in mice and rats, there were health hazards. The government did not tell the public, but in 1969 the findings were leaked by a dissident scientist. Shortly thereafter, the army stopped using Agent Orange.

When tort cases began to be filed against the manufacturers, a judge noted that “the government and the military possessed rather extensive knowledge tending to show that its use of Agent Orange in Vietnam created significant, though undetermined, risks to our military personnel.”

Nevertheless, the government denied liability, arguing that “any settlement that calls for contribution by the United States is not warranted.” The government consistently maintained that the substance was not dangerous. Benson points out that the scienti-fic evidence regarding the health effects of Agent Orange is questionable. A key judge in the case found the causal evidence insufficient. Benson states that if that is so, then the manufacturers should not have been held liable either. But they were pushed into a $180 million settlement, not including their own huge legal expenses. Benson comments that “without much doubt, the U.S. government has to be considered as the proximate cause of any harm that can legitimately be attributed to Agent Orange.” It helped develop one of the components. It compelled companies to supply the product. It knew about the potential hazard. And it ordered inexperienced personnel to use it without telling them of the possible danger. The story is similar with other substances, such as asbestos, much of the exposure to which occurred in government shipyards and for which the government also denies liability.

Since the government usually cannot be sued, victims turn to manufacturers of the culprit substance. In 1974 a court ruled that an asbestos maker was liable for the harm to a government shipyard worker. That set off an avalanche of suits against third parties, which in turn spawned the government-contractor defense. Under this defense, some firms would also be immune from liability, on grounds that they met government specifications. A 1988 Supreme Court ruling approved the defense, at least in some cases. As it now stands, the law is unclear. But, Benson points out, if the defense stands, “government suppliers will, like government decision makers, have stronger incentives to ignore the potential consequences of not informing others about the hazards they face, as long as they inform the government....”

Legal scholars have long thought that law works best when it is predictable and consistent from jurisdiction to jurisdiction. That was the case until about 30 years ago but not anymore. “The result is a good deal of uncertainty as to what the liability rules are,” Benson writes. It is the uncertainty itself, not any particular change, that Benson addresses in his study. If property and liability rules are fluid and hence unclear, people will invest in efforts to exploit the vagueness for monetary gain.

As examples of change, Benson points out that the duty owed by a manufacturer has been expanded for decades and the standard of liability has moved away from the idea of fault or negligence. Under strict liability, no showing of fault is required. Unlike previously, the courts are now willing to consider damages for intangible “harms,” such as fear of a future illness. The expansion of punitive damages, for which there is no clear standard, also constitutes a changing of the rules. In one case a jury, finding no good evidence of physical harm caused by a company, awarded the plaintiffs one dollar in compensation but $16 million in punitive damages. With toxic torts the potential for unreasonable punitive damages is immense. Another change is the courts’ willing-ness to allow damage awards from firms that might have had responsibility for the harm, although direct evidence is lacking. Some courts now accept statistical probability of harm in lieu of causal evidence in toxic cases.

The vagueness of the rules weakens property rights and puts valuable assets up for grabs. People are willing to spend money to obtain those assets through litigation. More wealth is dissipated as the owners of the assets try to protect them. (Benson notes that in asbestos cases, 75 percent of the $1 billion settlement went to the lawyers.) Because of this diversion of wealth, society is poorer than it would have been under a regime of reasonable and stable tort rules.