Product Liability and Game Theory: One More Trip to the Choice-of-Law Well

Modern scholarship defends the view that current choice-of-law trends are conducive to a balanced approach to product liability law, in which each state's substantive is unlikely to favor plaintiffs or defendants. This article takes issue with that scholarship. Using the insights of game theory, this article explains why American product liability under current choice-of-law constraints results in systematic and increasingly pro-plaintiff adjudication. Federalizing the substantive is the usual remedy offered for Prisoner's Dilemma problems in the states. This article criticizes the idea of preemptive substantive federal product liability and proposes in its stead a federal choice-of-law rule developed either legislatively or by the courts. A federal choice-of-law rule, if correctly crafted, would be both compatible with constitutional mandates and conducive to the resolution of the game theoretic problem. Several possible federal choice-of-law rules are examined, but only one, a law of first retail sale rule, passes the needed constitutional and game-theoretic musters. Practical and jurisprudential implications of this rule are also fleshed out in the article. I. INTRODUCTION Life in America is less risky, by any objective account, than it has ever been: we have proportionately fewer accidents, and live longer lives, than in the past.1 Yet the business of tort law, which forcibly reallocates certain kinds of risks, is thriving as never before. This is especially true for that subset of tort that is product liability.2 This article contends that much of the expansion of product liability3 is quite possibly not due to increased misfeasance by defendants or to increased risk-aversion by plaintiffs. Rather, this expansion may be the product, to a significant extent, of a beggarthy-neighbor4 legal arrangement intrinsically biased in favor of certain classes of local plaintiffs suing certain classes of out-of-state defendants.5 This inequity results from the unwitting creation of what is known in game-theoretical terminology as a Prisoner's Dilemma. This Prisoner's Dilemma has arguably played out as suboptimal liability across the country. This article identifies the game-theoretic dilemma, criticizes recent scholarship that misidentifies one of its causes as one of its cures, and sketches the parameters and implications of an effective structural solution. The proposed solution, unlike many substantive tort reform plans,6 has the advantage of preserving state jurisdiction over tort law. In addition to its Occam's Razor characteristics, the IMAGE FORMULA11 proposal avoids many coordination and knowledge problems that otherwise might prove insoluble. Part II of this article traces the modern upsurge in product awards and contrasts the predicament of product liability with the prevailing situation in other areas of tort law. Part II goes on to explain how this predicament is likely a manifestation of a Prisoner's Dilemma, particularly in light of the peculiar confluence of the Erie Railroad doctrine and its progeny. Part III shows how current state-based product liability law, accompanied by the two generic choice-of-law rules currently prevailing in the states, exacerbates the dilemma instead of resolving it. As a central feature of this part of the article, Part III considers an influential theme of current legal scholarship, which holds that the dominant American choice-of-law rule is helpful in resolving the game-theoretic problem. This article squarely rebuts that thesis. As a result of this refutation, recent trends in product liability are easier to understand and, it is contended, are finally amenable to solution. Having established both the existence and the cause of the Prisoner's Dilemma, the article explains in Part IV why federal preemption of product liability is not the best way to resolve it. …