It’s an argument both manufacturers and the defense bar have been making for years: an increased risk of liability for new products will deter manufacturers from developing new technologies. Yet despite the apparent logic of such an argument, there was scant empirical evidence backing up this claim . . . until last month.
Researchers Alberto Galasso of the University of Toronto and Hong Luo of Harvard Business School recently published a working paper that examines the impact of increased litigation for medical implant manufacturers in the early 1990s. The paper, titled “How Does Product Liability Risk Affect Innovation? Evidence From Medical Implants,” shows how this increase led to a decrease in downstream innovation in medical implants and demonstrates how tort reform—specifically the 1998 Biomaterials Access Assurance Act (BAAA)—subsequently reversed this trend and spurred further innovation for raw material manufacturers.
Before discussing the paper’s findings, it’s worth briefly discussing the two previous empirical studies that have been used by some to justify increased liability exposure for manufacturers. W. Kip Viscusi and Michael J. Moore published a large-scale empirical study titled “Product Liability, Research and Development, and Innovation” in the Journal of Political Economy in 1993. Looking at a cross-industry dataset of U.S. companies in the 1980s, Viscusi and Moore found a positive correlation between liability insurance expenditures and a company’s research and development intensity. They concluded that, instead of stifling innovation, increased product liability encouraged a higher level of production safety.
Similarly, the authors of the current paper, Galasso and Luo, published a study in 2017 which found that medical device patenting decreased when laws to limit a health care provider’s liability were passed. The authors hypothesized at the time that stronger product liability laws may encourage the development of risk-mitigating technologies. However, they also noted that more research was needed to look into the causal relationship between liability and innovation.
Galasso and Luo examined this causal relationship in their most recent study by distinguishing between upstream and downstream innovation. In the context of manufacturing, upstream innovation would be products or developments which a manufacturer relies upon and/or incorporates into its own product. Downstream innovation would be subsequent products or developments which were made possible by the manufacturer’s own product. Because one innovation leads to another, looking at the rates of patents filed both upstream and downstream can give researchers a better idea of where the impact of litigation is being felt.
For their case study, Galasso and Luo focused on litigation stemming from temporomandibular joint (TMJ) implants in the early 1990s. After the litigation bankrupted Vitek, Inc., the maker of the TMJ implant, plaintiffs subsequently sued E.I. du Pont de Nemours and Company (“DuPont”) for supplying the polymer used in the implants. While virtually every court to address the issue ultimately found DuPont not liable for its role in the manufacture of the TMJ implants, the litigation proved costly. So how did this litigation impact subsequent innovation for constituent part manufacturers?
Significantly, Galasso and Luo found a 36 percent decrease in medical implant patents relative to patents overall. At the same time, they found no significant decrease in upstream patents, including DuPont itself, who as a polymer manufacturer would be considered an upstream innovator for many medical devices. These results suggest that upstream innovation for products like polymers was not impacted because of the existence of additional downstream markets, which would not be threatened by increased litigation. At the same time, downstream manufacturers of both constituent parts and fully assembled implants were impacted because they did not have alternative markets for their products. The threat of increased litigation was enough to remove any economic incentive for further research and development for downstream technology.
While such a negative impact is clearly of concern for manufacturers, the study offered some good news when it comes to potential solutions. Specifically, the authors found that the passage of the BAAA in 1998 brought the relative rate of implant patent filings back to their pre-1990 rates. Under the BAAA, manufacturers of biomaterials—both upstream manufacturers such as DuPont and downstream manufacturers of parts specifically produced for medical devices—are generally shielded from liability with respect to medical devices that use their product, so long as the biomaterials manufacturer played no role in designing the medical device. The patent data examined by Galasso and Luo suggest that the BAAA has given downstream biomaterials manufacturers—the ones who had previously slowed their patent filings because their products only had medical applications—the confidence to proceed with new research and development without fear of being pulled into costly litigation for products they neither designed nor manufactured.
In a legal environment in which plaintiffs seem to be constantly looking for new categories of defendants to include in products liability lawsuits (for example, the ever-evolving world of asbestos litigation, or the recent lawsuits against Amazon for products manufactured and sold by third parties through their website), it is encouraging to see a policy that has appropriately narrowed the scope of liability for manufacturers. We hope that this can serve as a template for future policies to encourage technological innovation.