Federalism and Tort Reform:

My colleague Michael Krauss has an excellent column in the Wall Street Journal on federalism and tort reform (subscription-free excerpt available here). Currently, states with unusually stringent tort liability rules can impose them even on products that their residents purchased out of state. As Michael explains:

A manufacturer might want to charge higher prices in West Virginia to cover the legal 'premium' it must pay for unavoidable product-liability rules there. It wouldn't work. Mountaineers could simply purchase the product in neighboring Maryland and bring it back home — and current jurisdictional rules essentially provide that West Virginia tort law will apply to all accidents occurring there, regardless of where the consumer bought the product.

"West Virginia consumers, in other words, obtain the same tort 'coverage' — but for a lower premium — if they buy the product in Maryland. As a result, manufacturers aren't able to lower the price of their products in Maryland to reflect that state's less onerous (or ridiculous) product liability rules, because they may end up incurring the higher liability costs of West Virginia. I believe this helps to explain the product liability mess in the U.S. We have more product liability than we want because of a beggar-thy-neighbor 'Byrd Effect.'

He proposes a federalist solution to the problem:

Suppose, however, a federal law declared that the laws and rules governing product liability applicable to a given product are the rules of the state where that product was first sold at retail.

Thus, if a West Virginian bought his lawn mower in Maryland, it would be Maryland law that determined product liability, even if an accident involving an alleged defect happened later in West Virginia . . . Manufacturers could now price goods in each state to reflect that state's liability rules — allowing consumers to pay for the liability protection they wanted. Competition would provide consumers with knowledge of what this all means. West Virginia retailers would have a keen incentive to explain to consumers how they receive greater protection — in return for a higher purchase price . . .

Of course, consumers might not want to pay for this extra protection. Suppose that the West Virginia retail price of a lawn mower includes a premium reflecting the outlays required by a product liability rule requiring full compensation to a consumer injured through his own misuse of a product. The consumer might say, 'Thanks but no thanks. I'll take my chances,' and buy his lawnmower in Maryland, where this 'misuse protection' is not bundled into the purchase price. West Virginia retailers lose sales; and if the losses became apparent, these retailers would be well placed to pressure political representatives to modify liability rules so as to better reflect consumers' actual preferences.

Michael's proposal is better than the traditional conservative approach of trying to impose one-size-fits-all tort reform through the federal government. There is no reason to believe that the feds will come up with a good solution that reflects the diverse needs of different states. Even if they do, Congress will have little incentive to make efficient adjustments to the rules over time. Michael's approach is also better than the status quo, which in effect allows the most pro-plaintiff states to set prices and product standards for the entire country. States should be allowed to set tort policy for products sold within their own borders. Interstate competition and consumer choice will give them strong incentives to avoid overreaching, while simultaneously addressing legitimate safety concerns. But they should not be allowed to in effect impose their tort liability rules on products sold elsewhere.

More generally, Michael's argument reflects an important theme in the emerging literature on federalism: in order to achieve the benefits of interstate competition and diversity, we must limit not only the powers of the federal government, but also the power of state governments to control people and businesses outside their borders. Northwestern law professor John McGinnis and I made this case in our 2004 article Federalism vs. States' Rights. Most people - even most constitutional lawyers - think of federalism as a system of limitations on central government power. But in many situations, it actually entails limits on the power of state governments as well.