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THE FORD PINTO CASE:

users.wfu.edu /palmitar/Law&Valuation/Papers/1999/Leggett-pinto.html

THE FORD PINTO CASE:

THE VALUATION OF LIFE AS IT APPLIES
TO THE NEGLIGENCE-EFFICIENCY ARGUMENT

The cases involving the explosion of Ford Pinto's due to a defective fuel system
design led to the debate of many issues, most centering around the use by Ford of a
cost-benefit analysis and the ethics surrounding its decision not to upgrade the fuel
system based on this analysis.

ISSUE

Should a risk/benefit analysis be used in situations where a defect in design or

manufacturing could lead to death or seriously bodily harm, such as in the Ford Pinto
situation?

RULE

There are arguments both for and against such an analysis. It is an economically
efficient method which has been accepted by courts for numerous years, however,
juries may not always agree, so companies should take this into account.

ANALYSIS

Although Ford had access to a new design which would decrease the possibility of the
Ford Pinto from exploding, the company chose not to implement the design, which
would have cost $11 per car, even though it had done an analysis showing that the
new design would result in 180 less deaths. The company defended itself on the
grounds that it used the accepted risk/benefit analysis to determine if the monetary
costs of making the change were greater than the societal benefit. Based on the
numbers Ford used, the cost would have been $137 million versus the $49.5 million
price tag put on the deaths, injuries, and car damages, and thus Ford felt justified not
implementing the design change. This risk/benefit analysis was created out of the
development of product liability, culminating at Judge Learned Hand's BPL formula,
where if the expected harm exceeded the cost to take the precaution, then the
company must take the precaution, whereas if the cost was liable, then it did not have
to. However, the BPL formula focuses on a specific accident, while the risk/benefit
analysis requires an examination of the costs, risks, and benefits through use of the
product as a whole. Based on this analysis, Ford legally chose not to make the
design changes which would have made the Pinto safer. However, just because it
was legal doesn't necessarily mean that it was ethical. It is difficult to understand how
a price can be put on saving a human life.
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There are several reasons why such a strictly economic theory should not be used.
First, it seems unethical to determine that people should be allowed to die or be
seriously injured because it would cost too much to prevent it. Second, the analysis
does not take into all the consequences, such as the negative publicity that Ford
received and the judgments and settlements resulting from the lawsuits. Also, some
things just can't be measured in terms of dollars, and that includes human life.
However, there are arguments in favor of the risk/benefit analysis. First, it is well
developed through existing case law. Second, it encourages companies to take
precautions against creating risks that result in large accident costs. Next, it can be
argued that all things must have some common measure. Finally, it provides a bright
line which companies can follow.

Text

I. Introduction

In May of 1968, the Ford Motor Company, based upon a recommendation by then
vice-president Lee Iacocca, decided to introduce a subcompact car and produce it
domestically. In an effort to gain a large market share, the automobile was designed
and developed on an accelerated schedule. During the first few years sales of the
Pinto were excellent, but there was trouble on the horizon.

A. Grimshaw v. Ford Motor Company1

In May 1972, Lily Gray was traveling with thirteen year old Richard Grimshaw in a
1972 Pinto when their car was struck by another car traveling approximately thirty
miles per hour. The impact ignited a fire in the Pinto which killed Lily Gray and left
Richard Grimshaw with devastating injuries. A judgment was rendered against Ford
and the jury awarded the Gray family $560,000 and Matthew Grimshaw $2.5 million in
compensatory damages. The surprise came when the jury awarded $125 million in
punitive damages as well. This was subsequently reduced to $3.5 million.2

B. The Criminal Case3

Six month following the controversial Grirnshaw verdict, Ford was involved in yet
another controversial case involving the Pinto. The automobile's fuel system design
contributed (whether or not it was the sole cause is arguable) to the death of three
women on August 10, 1918 when their car was hit by another vehicle traveling at a
relatively low speed by a man driving with open beer bottles, marijuana, caffeine pills
and capsules of "speed."4 The fact that Ford had chosen earlier not to upgrade the
fuel system design became an issue of public debate as a result of this case. The
debate was heightened because the prosecutor of Elkart County, Indiana chose to
prosecute Ford for reckless homicide and criminal recklessness.
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Some felt the issues raised in the Ford Pinto cases were an example of the "deep
pocket" company disregarding consumer safety in pursuit of the almighty dollar.
Others feel they are an example of runaway media coverage blowing a story out of
proportion.5 Regardless of opinion, the Ford Pinto case is a tangled web of many
complex legal and ethical issues.

To determine if the proper result was achieved in this case, one has to evaluate and
weigh these many issues. The central issue in deciding whether Ford should be liable
for electing not to redesign a defective product in order to maximize its bottom line,
one must analyze the so-called "cost/benefit" analysis Ford used to defend this
decision. Within the scope of this paper, this cost/benefit issue (and associated sub-
issues) will be the focus of discussion. Other issues, such as the ethics involved in
Ford's decision, the choice of prosecuting Ford criminally, whistle-blowing, the
assignment of punitive damages and the Court of Appeals decision reducing the
damages are all important issues of this case that will not be the focus herein.

II. Facts

A. Incident Facts

On August 10, 1978, three teenage girls stopped to refuel the 1973 Ford Pinto sedan
they were driving. After filling up, the driver loosely reapplied the gas cap which
subsequently fell off as they headed down U. S. Highway 33. Trying to retrieve the
cap, the girls stopped in the right lane of the highway shoulder since there was no
space on the highway for cars to safely pull off the roadway. Shortly thereafter, a van
weighing over 400 pounds and modified with a rigid plank for a front bumper was
traveling at fifty five miles an hour and stuck the stopped Pinto. The two passengers
died at the scene when the car burst into flames. The driver was ejected and died
shortly thereafter in the hospital. Inspecting the van shortly after the accident, the
police found open beer bottles, marijuana and caffeine pills inside.6

The subsequent proceedings were rather surprising. Based on the facts of the case, it
seemed that any one of a number of parties could be liable in a civil action or
prosecuted criminally. The obvious target seemed to be the driver of the van. It seems
he could have been prosecuted for criminal homicide or the families of the victims
could have pursued a civil action, in light of the fact the driver possessed several
controlled substances at the time of the accident.

A second potential party open to a civil suit was the Indiana Highway department. It
was their design which left no safe stopping place along Highway 33 where cars could
pull over for emergencies. In fact, the road was so dangerous that the Elkart County
Citizens' Safety Committee had previously written a letter to the department asking
that the road design be modified to provide safe stopping place for emergencies.7 It is
also conceivable, the driver of the Pinto could have been found negligent for stopping
a car in the middle of the highway.
The first surprise of the resulting litigation carne when Indiana state prosecutor filed
suit against Ford Motor Company for criminal recklessness and reckless homicide.8
The famous and highly publicized legal battle was underway. Some have argued the
prosecution acted unethically from day one, gathering and hiding evidence from the
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defendant and concealing information about the condition of the van driver.9 Whether
true or not, the following litigation caused damage that would take Ford years to
recover from.

B. Questionable Design

The controversy surrounding the Ford Pinto concerned the placement of the
automobile's fuel tank. It was located behind the rear axle, instead of above it. This
was initially done in an effort to create more trunk space. The problem with this
design, which later became evident, was that it made the Pinto more vulnerable to a
rear-end collision. This vulnerability was enhanced by other features of the car. The
gas tank and the rear axle were separated by only nine inches. There were also bolts
that were positioned in a manner that threatened the gas tank. Finally, the fuel filler
pipe design resulted in a higher probability that it would to disconnect from the tank in
the event of an accident than usual, causing gas spillage that could lead to dangerous
fires. Because of these numerous design flaws, the Pinto became the center of public
debate.

These design problems were first brought to the public's attention in an August 1977
article in Mother Jones magazine. This article condemned the Ford Motor Company
and the author was later given a Pulitzer Prize.10 This article originated the public
debate over the risk/benefit analysis used by the Ford Motor Company in their
determination as to whether or, not the design of the Pinto fuel tank be altered to
reduce the risk of fire as the result of a collision.

The crux of the public debate about The Ford Motor Company was the decision not to
make improvements to the gas tank of the Pinto after completion of the risk/benefit
analysis. Internal Ford documents revealed Ford had developed the technology to
make improvements to the design of the Pinto that would dramatically decrease the
chance of a Pinto "igniting" after a rear-end collision.11This technology would have
greatly reduced the chances of burn injuries and deaths after a collision. Ford
estimated the cost to make this production adjustment to the Pinto would have been
$11 per vehicle.12 Most people found it reprehensible that Ford determined that the
$11 cost per automobile was too high and opted not to make the production change to
the Pinto model.

C. Risk/Benefit Analysis

In determining whether or not to make the production change, the Ford Motor
Company defended itself by contending that it used a risk/benefit analysis. Ford
stated that its reason for using a risk/benefit analysis was that the National Highway
Traffic Safety Administration (NHTSA) required them to do so.13 The risk/benefit
approach excuses a defendant if the monetary costs of making a production change
are greater than the "societal benefit" of that change. This analysis follows the same
line of reasoning as the negligence standard developed by Judge Learned Hand in
United States vs. Carroll Towing in 1947 (to be discussed later). The philosophy
behind risk/benefit analysis promotes the goal of allocative efficiency. The problem
that arose in the Ford Pinto and many other similar cases highlights the human and
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emotional circumstances behind the numbers which are not factored in the risk/benefit
analysis.

The Ford Motor Company contended that by strictly following the typical approach to
risk,/benefit analysis, they were justified in not making the production change to the
Pinto model. Assuming the numbers employed in their analysis were correct, Ford
seemed to be justified. The estimated cost for the production change was $11 per
vehicle. This $11 per unit cost applied to 11 million cars and 1.5 million trucks results
in an overall cost of $137 million.

The controversial numbers were those Ford used for the "benefit" half of the equation.
It was estimated that making the change would result in a total of 180 less burn
deaths, 180 less serious burn injuries, and 2,100 less burned vehicles. These
estimates were multiplied by the unit cost figured by the National Highway Traffic
Safety Administration. These figures were $200,000 per death, $67,000 per injury, and
$700 per vehicle equating to the total "societal benefit" is $49.5 million. Since the
benefit of $49.5 million was much less than the cost of $137 million, Ford felt justified
in its decision not to alter the product design. The risk,/benefit results indicate that it is
acceptable for 180 people to die and 180 people to burn if it costs $11 per vehicle to
prevent such casualty rates. On a case by case basis, the argument seems
unjustifiable, but looking at the bigger picture complicates the issue and strengthens
the risk/benefit analysis logic.

III. History and Development of Product Liability

A. Introduction

When defendants were found liable for only intentional harms, these harms fell under
the category of absolute liability. Over time, courts added liability to some accidental
harms. In order for a court to determine there was no liability in a conflict, it had to be
ascertained whether or not the accident was "truly unavoidable."14 Technological
advances created societal harms that were never before contemplated by courts. The
truly unavoidable standard became a grayer area that was undefined and unreliable.
Eventually, as industry rapidly advanced further, it became impossible and
unreasonable to describe any accident as unavoidable.15 Still, courts seemed
unwilling to shift to the theory of absolute liability, as it seemed to strict. However, with
the courts finding fewer and fewer harms "unavoidable", another level had to be found
between unavoidable accidents and strict liability.16

B. The Ordinary Care Standard

In the mid 1800s, courts began the evolution of moving away from what they once
considered an important decision--whether a harm was a result of an action "on
trespass" or a harm as a result of an action "on the case."17 The first landmark
decision moving away from this distinction and thinking was Brown v. Kendall18 in
1850. In the decision, Chief Justice Shaw acknowledged moving away from this
traditional distinction and to consideration of whether a harm was "willful, intentional,
or careless."19 Not only did this decision move away from the strict "all or nothing"
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standard, it established the fluctuating standard of "ordinary care." Judge Shaw

explained the use of this new standard:

"In using this term, ordinary care, it may be proper to

state that what constitutes ordinary care will vary with
the circumstances of cases. In general, it means that
kind and degree of care, which prudent and cautious
men would use, such as required by the exigency of the
case, and such as is necessary to guard against
probable danger."20

In essence Judge Shaw had created a "moving"

standard of negligence that varied from situation to
situation depending on the extent of care used, rather
than the inflexible extremes discussed above. This new
standard was not just a flat decision of whether an actor
used due care in a situation, but whether the actor
should have recognized the danger before taking the
risk. Courts also required a defendant's actions be
related to the harm incurred. In Crain v. Petrie,21 the
court stated that "damages must appear to be the legal
and natural consequences arising from the tort.22
Courts also considered whether the defendant should
have taken some kind of preventive measure in
advance that could have foreseeable prevented the
harm.23

These many factors the court considered boiled down into one main question: Was the accident truly
avoidable or the fault of the defendant?24 The Brown court stated,

"If, then, in doing this act, using due care and all proper precautions
necessary to the exigency of the case, to avoid the hurt to others, in
raising his stick..., he accidentally hit the plaintiff in his eye and
wounded him, this was the result of the pure accident, or was
involuntary, and unavoidable, and therefore the action would not lie.25
This thinking was followed in similar cases and decisions of the
time.26 As stated above, this thinking moved the court from cut-and-
dried ideas of negligence to ones that fluctuated and had to be
examined on a case by case basis. If an accident seemed to be
unavoidable and part of every day life there would be no action for
recovery.

As technology progressed, courts began to find less and less accidents "unavoidable."
In Huntress v. Boston & Main R.R.,27 the court found the defendant negligent even
though it took all necessary precautions. When a pedestrian was killed walking across
the railroad tracks and the locomotive engineer had used all possible precautions in
conducting the train, the defendant was still found to be negligent. The court stated
that the railroad company should have foreseen the plaintiff's poor appreciation of the
risk and that whether more precautions were necessary was a question for the jury.28
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As the power of design and invention advanced, so did the courts' perception of the
power to prevent accidents.29 It seemed the courts had almost moved to the
extreme of absolute liability.

With this evolution, the courts were faced with a new problem. Should defendants be
found liable in almost every situation because of new technological 'advancements?
This created a new theory of negligence, one of balancing risks and benefits. In the
early 1900s the courts evolved from just determining if an accident were unavoidable
(as most at this point were considered to be) to what the costs were to avoid this
accident in some fashion. The first attempt to consider this question and create a new
standard was in a 1919 case, Adams v. Bullock.30

In Adams, a young boy was playing with a rod when it struck the defendant's trolley
wires that had been strung under a railroad bridge where the boy was walking. The
court reversed a judgment for the plaintiff, claiming that the company had taken all
reasonable precautions to avoid the accident. Judge Cardozo's opinion made use of
the traditional analysis and verbiage of the avoidable/unavoidable analysis. However,
he discussed the "duty to adopt all reasonable precautions.31Furthermore, Judge
Cardozo stated that the defendant had acted with the area of normal provision.32

C. The Introduction of the Balancing Approach

Although Judge Cardozo concluded that the accident was not foreseeable and
therefore unavoidable, the Adams case laid the groundwork for a "balancing"
approach to negligence. The balancing approach assumes that if an accident has a
very low probability, and there is a cost associated with preventing it, a defendant is
not liable if he does not take precautionary measures. By stating that absent a "gift of
prophecy the defendant could not have predicted the point upon the route where such
an accident would occur," Judge Cardozo indicated that giving every possibility the
ultimate amount of protection would be too costly compared to the risk of injury.33 He
further stated that guards everywhere would have prevented the injury but this would
prove to be much too costly, and "guards here and there are of little value.34 This
decision was the harbinger of the balancing standard and cost/benefit analysis; a
weighing of the risk of harm and the overall costs of avoiding it.

At the turn of the century, courts began focusing on this "balancing" method to
determine liability. Costs, risks, and probability began to make their way into
decisions. Courts began to compare degrees of risks and costs of harms with the
benefits of activities on society. The trend moved toward placing the burden on society
in instances where the benefit outweighed the risk or the risk was less than the cost to
avoid it.35 In cases such as this, the ``risk initiator" was assigned no liability. This
balancing act seemed to be a tolerable middle ground between the old negligence
liability standard and the extreme standard of absolute liability.

With courts struggling to define the middle ground during this time of technological
advancement, they faced the same questions legal systems faced in similar times
such as the industrial revolution and the growth of railroads. As the advancements
created new products and the profits that went with them, courts had to decide what
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levels of risk society could tolerate and who should bear the costs when harms
actually occurred.36

D. The "BPL" Formula

With the evolution of the negligence standard incorporating risks and costs, courts
sought a middle ground that would not leave defendants open for unreasonable
liability suits but which also would not leave victims uncompensated when damages
had occurred. In the 1947 decision of United States v. Carroll Towing Co.,37 Judge
Learned Hand boiled the theory of negligence down to an algebraic equation. In
Carroll Towing, a barge named the "Anna C" was tied up to a pier along with a flotilla
of other barges. A tug, the "Carroll," owned by the Carroll Towing Company attempted
to move from one barge in the same area to another. During this time, the "Anna C"
broke away from the pier and floated down the river where it collided with a tanker and
sank. Since there was no bargee on board the "Anna C," no one informed the
"Carroll" that the "Anna C" was leaking. Because of this, the "Anna C" sank and its
cargo was lost. Under admiralty law, if the defendants could prove that plaintiff's
negligence contributed to the loss, they would be excused from paying a portion of the
damage.38 The defendant's argument was based on the fact that since there was no
bargee present, the plaintiff was also liable. However, there was no general rule as to
whether the presence of a bargee would make the owner of the barge liable for lost
cargo and injuries to other boats.

Judge Hand attempted to quantify a criteria to determine when leaving a barge

unattended was negligence and when it was not. He decided that this would be
determined by a weighing of the factors discussed above. Judge Hand transformed
the "balancing act" utilized in prior decisions. In his opinion, he wrote:

"Since there are occasions when every vessel will break

from her moorings, and since, if she does, she becomes
a menace to those about her; the owner's duty, as in
other similar situations, to provide against resulting
injuries is a function of three variables: (1) The
probability that she will break away; (2) the gravity of
the resulting injury, if she does; (3) the burden of
adequate precautions. Possibly it serves to bring this
notion into relief to state it.in algebraic terms: if the
probability be called P; the injury, and the burden, B;
liability depends upon whether B is less than L
multiplied by P."39

Under the theory that Judge Hand developed in Carroll, a party is found negligent and
liable for the damages resulting from his actions if B<PL. "B," the burden of adequate
precautions, is the accident avoidance cost. "P" is the probability the defendant's
actions will result in an accident. "L" is the cost of that accident if it did occur. "PL" is
the risk of the activity, the expected liability of the discounted accident cost.40 The
negligence standard had been formalized into algebraic terms. If the expected harm
exceeded the cost to take precaution, the defendant was obligated to take the
precaution, and if they did not, would be held liable. If the cost was larger than the
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expected harm, the defendant was not expected to take the precaution. If there was
an accident, he was not found liable. Based on the facts of Carroll Towing, the
defendant was found liable. Judge Hand felt the expected harm (the probability of the
accident, multiplied by the cost of the accident) was greater than the justification for a
one and a half day absence of a bargee.41

E. Risk/Utility Analysis

Risk/utility analysis then developed out of the same balancing reasoning, applied to
determine liability in the area of product design. In these types of cases, courts must
determine whether a manufacturer should be held liable if goods are "imperfect" as a
result of production or distribution. In past cases, courts had difficulty in this area. In
Greenman v. Yuba Power Products, Inc.,42 a 1963 case, the court stated that the
defendant was not able to see the possibility for injury until after the injury occurred
and by traditional negligence standards should be found not liable.43 This type of
conclusion troubled the courts, since the burden on the plaintiff seemed almost
insurmountable.

There were a number of reasons why this type of finding was unfair. First and
foremost, companies' manufacturing operations are the party in control of the product
from its inception. Manufacturing divisions have a chance to monitor design and
distribution and therefore seems the logical party to be held liable if the design of its
product leads to an injury. However, it seems illogical for the consumer to bear the
burden of a harm it had absolutely no control over. Also, requiring manufacturers to be
liable for their products makes them take more precautionary measures, the cost of
which can be spread out in the price of its products to the consumers who make use
of them.44 The problem was the same, however. Where is the middle ground
between the earlier standard and absolute liability and how is it defined?

The first step in finding this middle ground in manufacturing liability cases was to
remove requirements of warranty and privity of contract that manufacturers used to
escape liability in the past.45 In Greenman, the court stated that removing the
obstacles earlier set by warranty law put manufacturer's liability in the correct realm.
This area was "not one governed by the law of contract warranties but by the law of
strict liability in tort ... A manufacturer is strictly liable in tort when an article he places
in the market... proves to have a defect that causes injury to a human being."46 The
obvious question therefore was, what is a "defective product"?47

The definition provided by section 402A of the Second Restatement of Torts assigned
strict liability to products with "a condition not contemplated by the ultimate consumer,
which will be unreasonably dangerous to him ... Many products cannot possibly be
made entirely safe for all consumption, and any food or drug necessarily involves
some harm, if only from overcomsumption."48 Obviously, there was intended to be
some leeway short of strict liability for manufacturers, but there was still no clear
answer as to what was defective and what was not.49

Attempting to end the frustration and quantify "defective product," courts started to
turn to a risk-utility balancing similar to Judge Learned Hand's "BPL Formula." This
evolved into a balancing of the benefits of the product against the risks and the cost of
avoidance. In Caterpillar Tractor Co. v. Beck,50 the court stated the jury could be
instructed a product is defectively designed if "the plaintiff proves that the product's
design proximately caused injury and the defendant fails to prove in the light of
relevant factors, that on balance the benefits of the challenged design outweigh the
risk of the danger inherit in .such design."51In Turner v. General Motors Corp,52 the
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court stated that "a defectively designed product is one that is unreasonably
dangerous as designed, taking into consideration the utility of the product and the risk
involved in its use."53

After long debate, the courts have settled upon this risk/benefit analysis. For a
defendant to be found liable, its product must be determined to be defective. A defect
can take three forms: a defect in design (as was alleged against the Ford Motor
Company), a defect in manufacture, or a defect in warning. In Ford's case, if the
design is found to be defective, the company would be held liable. The question
remains, what makes a design defective?

While not stated neatly in algebraic terms, such as in the BPL analysis, this entails a
balancing of utility and risks. This standard is not easily quantified and must be
decided on a case-by-case basis by juries. They must decide in each instance
whether the risks associated with the product are reasonable for society to absorb
given the benefits of the product. Therefore, the duty of the jury is not to decide
whether the conduct of the manufacturer is reasonable, but whether the product, after
the full ramifications are revealed, is reasonable. The difference is that risk/utility
analysis requires a determination of the costs, risks and benefits of society's use of
the product as a whole, while the 13PL cost/benefit analysis entailed determining the
costs and benefits of preventing the particular accident. In the end, the risk-utility's
primary duty is to establish a threshold of acceptable risk that every good must equal
or exceed, a threshold that can rise with changing social and commercial
experience.54 This leads to a economically efficient use of resources and overall
wealth maximization.

F. Ford's Risk/Benefit Analysis

The main controversy surrounding the Ford Pinto case was The Ford Motor
Company's choices made during development to compromise safety for efficiency and
profit maximization. More specifically, it was Ford's decision to use the cost/benefit
analysis detailed in section 11 to make production decisions that translated into lost
lives. During the initial production and testing phase, Ford set "limits for 2000" for the
Pinto. That meant the car was not to exceed $2000 in cost or 2000 pounds in weight.
This set tough limitations on the production team. After the basic design was
complete, crash testing was begun. The results of crash testing revealed that when
struck from the rear at speeds of 31 miles per hour or above, the Pinto's gas tank
ruptured. The tank was positioned according to the industry standard at the time
(between the rear bumper and the rear axle), but studs protruding from the rear axle
would puncture the gas tank. Upon impact, the fuel filler neck would break, resulting in
spilled gasoline. The Pinto basically turned into a death trap. Ford crash tested a total
of eleven automobiles and eight resulted in potentially catastrophic situations. The
only three that survived had their gas tanks modified prior to testing.55

Ford was not in violation of the law in any way and had to make the decision whether
to incur a cost to fix the obvious problem internally. There were several options for fuel
system redesign. The option most seriously considered would have cost the Ford
Motor Company and additional $11 per vehicle.56 Under the strict $2000 budget
restriction, even this nominal cost seemed large. In addition, Ford had earlier based
an advertising campaign on safety which failed miserably. Therefore, there was a
corporate belief, attributed to Lee Iacocca himself, of "safety doesn't sell."57

Ultimately, the Ford Motor Company rejected the product design change. This was
based on the cost-benefit analysis performed by Ford (see Exhibit One). Using the
NHTSA provided figure of $200,000 for the "cost to society" for each estimated fatality,
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and $11 for the production cost per vehicle, the analysis seemed straightforward. The
projected costs to the company for design production change were $137 million
compared to the project benefits of making the design change which were
approximately $49.5 million. Using the standard cost/benefit analysis, the answer was
obvious--no production changes were to be made.

Exhibit One: Ford's Cost/Benefit Analysis IV. The Negligence Efficiency

Argument

A. Ford's Decision

The Ford Motor Company's use of the risk/benefit analysis was the central issue of
the suits filed against the company. Many pieces of evidence, including a number of
internal Ford documents indicate the risk/benefit analysis was the main reason for
Ford's decision not to make design changes to increase vehicle safety. However,
before discussion of the risk/benefit analysis it should be noted there were secondary
concerns which supported Ford's decision not to upgrade the fuel system design: (1)
As stated above, Ford had based an earlier advertising campaign around safety,
which failed. The company realized this was not a primary factor in car sales; (2) the
bad publicity involved with a recall would be too much negative publicity to overcome.
If this unquantifiable factor were included in the cost/benefit analysis the difference
may have been overwhelming. Even though it was not a factor included in the
analysis, Ford wanted to avoid it at any cost; (3) At the time of the product design and
crash tests, the law did not require them to redesign the fuel system; and, (4) It was
customary in the automotive industry to place the gas tank and between the rear axle
and bumper.

Although case law has shown that business custom is not an excuse to escape
liability, custom combined with the risk/benefit analysis would lead to the same
result.58 With these factors influencing the decision in the background, the primary
factor was Ford's risk/benefit analysis of making the changes. The question is: Should
a risk/benefit analysis be used in all circumstances, and was it the proper framework
to use in this situation? If so, it seems that the correct decision was made. Examining
this question after-the-fact, it certainly seems like a poor decision.

B. The Numbers

The Ford Motor Company's risk/benefit analysis indicated costs would be 2.5 times
larger than the resulting benefits. It is apparent why Ford chose no to go ahead with
the fuel tank adjustment. However, basing this decision on just the numbers with no
consideration of any other factors falls short of a comprehensive analysis of the
action. chose not to go ahead with the fuel tank adjustment. To do a complete job of
analyzing Ford's decision, the variables inside the equation must be examined. On the
cost side of the equation, the most questioned variable during the case was the cost
per vehicle used by Ford. The manufacturer claimed making adequate changes to the
fuel system would have cost $11 per vehicle. Some evidence indicated that these
potential costs may have been much lower, maybe as low as $5 per vehicle.59 Even
with this lower cost and all other factors remaining the same, the costs still would have
exceeded the benefits, although the difference would have been much less
substantial (see Exhibit 2). In fact, will all other variables remaining the same, the cost
per vehicle would have had to be as low as $3.96 to make the benefits "break even"
with the costs (see Exhibit 3). However, if the costs were around $5 per vehicle, the
Ford Motor Company would not have had as strong a risk/benefit argument as with
the $11 figure provided.
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The "benefit side" of the equation contains the most controversial number of the
analysis--the value of a human life. Ford estimated no alterations to the gas tank
design would result in 180 deaths, 180 burn victims and 2100 burned vehicles. In
retrospect, these estimates are slightly low. It is hard to determine the exact number of
victims because every victim did not file a claim, but these numbers were reasonable
estimations at the time. Ford used $200,000 as the "cost" or "lost benefit" for each
fatal burn injury, 567,000 for each burn injury and $700 for each burned vehicle. The
number quantifying the price of a value life ($200,000) is what makes this problem so
difficult. It is hard to decide what a life is worth, but most people feel the value of theirs
is greater than $200,000. While this $200,000 figure was the most controversial of the
equation, it was not determined by Ford. In 1972, the National Highway Traffic Safety
Administration (NHTSA) provided the auto industry with the number $200,725 as the
value to be utilized in risk/ benefit analysis such as was done by Ford (see Exhibit
4).60 Following the standard for negligence established by Judge Learned Hand in
Carroll Towing, or the risk/utility standard established for manufacturer's liability, the
decision was well founded. The costs to Ford to make this change, which would have
been borne by the consumer, was 2.5 times higher (using the original numbers) than
the benefit to society. Some negative publicity may have been expected, but certainly
Ford did not anticipate being found criminally negligent. In fact, it would seem Ford
had a strong argument against any liability whatsoever. The decision in the liability
suit with the award of punitive damages was a surprise to the Ford Motor Company,
much less the criminal prosecution. How could such a decision be rendered after Ford
Motor Company had followed the standard set by the courts themselves? The answer
lies in the fact that the "benefit" side of the equation included the benefit of saving
lives, and putting a value on this variable is not as defensible as putting a value on the
benefit of saving an inanimate object, such as a vehicle.

V. The Negligence-Efficiency Debate

A. Introduction

The Ford Motor case has spurned the arguments for and against the use of
risk/benefit analysis because of its foundation of economic efficiency. The Ford Motor
Company case has spurred this argument. In 1972, Judge Richard Posner's article on
the negligence-efficiency theory seemed to be the "starting point" for this argument
and was both highly praised and highly criticized. The essence of this article is
summarized in the following excerpt: "We lack a theory to explain the social function
of the negligence concept ... This article attempts to formulate and test such a
theory.... The essential clue, I believe, is provided by Judge Learned Hand's famous
formulation of the negligence standard.... In a negligence case, Hand said, the judge
(or jury) should attempt to measure three things: the magnitude of the loss if an
accident occurs; the probability of the accident's occurring; and the burden of taking
precautions that would avert it. If the product of the first two terms exceeds the burden
of precautions, the failure to take those precautions is negligence. Hand was
adumbrating, perhaps unwittingly, an economic meaning of negligence.... If the cost of
safety measures.... exceeds the benefit in accident avoidance to be gained by
incurring that cost, society would be better off, in economic terms, to forego accident
prevention.... Furthermore, overall economic value or welfare would be diminished ...
by incurring a higher accident-prevention cost to avoid a lower accident cost.''61

Thus, the economic efficiency of negligence argument was born. While many
economists have agreed and praised this article, it has been equally criticized by
those not taking the "economic point of view." I will first discuss some of the many
arguments against this economic efficiency point of view in light of the Ford Pinto
case. Following is a further elaboration of Posner's view and defense of his position.
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B. Arguments Against Negligence-Efficiency

1. Ethics

Taking an ethical approach to the Ford Pinto case makes accepting the risk/benefit
analysis performed by the Ford Motor Company difficult. In making what seems to be
the correct decision based on numbers, Ford is essence adopted a policy of allowing
a certain number of people to die or be injured even though they could have
prevented it. When taken on a case-by-case basis the decision seems to be a blatant
disregard for human life. From a human rights perspective, Ford disregarded the
injured individual's rights and therefore, in making the decision not to make
adjustments to the fuel system, acted unethicallv.62

2. Act Utilitarianism

A second problem with strictly applying the risk/benefit framework is that it does not
seem to take into account all of the consequences of Ford's decision. This position is
considered the "act utilitarian' point of view. The act utilitarian approach evaluates
each action separately and the consequences that arise from it.63 This analysis
would include any "harms" or "benefits" incurred by any people involved in the case.
In utilizing this approach, it seems there are many factors that the Ford Motor
Company did not account for in its risk/benefit analysis. When taking the situation
from this perspective, it seems like the harms of not changing the fuel system
outweighed the benefits. Not included in the previous risk/benefit analysis was the
millions of dollars in settlements in unreported cases that never saw the courtroom. It
is almost a sure bet that the settlement numbers were more on a per-case basis than
the average numbers used for lost life per accident. Also, the bad publicity and
reputational damage suffered by Ford over the next few years for being the cause of
these lawsuits is hard to quantify, but the harm was considerable.64 >From the
utilitarian point of view, the harms and the benefits are far closer together than Ford
determined in its analysis. In addition, if this was figured after-the-fact the harms far
outweighed the benefits. This would be due to the cost of having to recall the 1971-
1976 Pintos after the fact and the extreme bad publicity (much worse than could have
been expected) that the Ford Motor Company suffered through for years after all
litigation was settled.

3. Health and Safety Regulation Exception

Critics argue there are several other related, yet distinct reasons why the Ford Motor
company, as well other companies finding themselves in similar positions, should be
condemned for relying on a risk/benefit analysis to make decisions based on
consumer safety. In the areas of safety and health regulation, there are instances
where it may not be wise to undertake a certain decision even though the benefits do
not outweigh the costs.65 This idea is imbedded somewhere between the utilitarian
point of view and ethical point of view, discussed above. That is, the issue of whether
the benefits outweigh the costs should not govern our moral judgment. There are
some cases where a company must "do the right thing." While this may seem an
argument based on emotion, there seem to be certain instances where these kind of
considerations must be made. For instance, when governmental officials decide what
level of pollution is allowable they take into effect certain vulnerable people--such as
asthmatics or the elderly--and set the standard higher although the average citizen
would not be affected by a lower one. This decision escapes the risk/benefit analysis.
The higher standard is set so that the rights of the minority are not sacrificed for the
needs of the majority. This kind of decision, much like automobile safety, are in the
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realm of specially valued things. For these, many will argue, risk/benefit analysis
should not apply.66

4. Expressing Terms in Dollar Values

In order to perform a risk/benefit analysis, all costs and benefits must be expressed in
some common measure. This measure is typically in dollars, as the Ford Motor
Company used in its analysis. This can prove difficult for things that are not commonly
bought and sold on the open market. This is mainly the case for environmental policy,
such as permissible levels of air pollutants, as in the example above.67 The Ford
Pinto case provides an extreme example. It questions how to value human life.

Economists have attempted to quantify, non-quantifiable items using varying methods with varying success.68
Since individuals have unique tastes and values they are willing to pay different amounts for products and
resources. This valuation system often receives high criticism. People's willingness to pay for something can also
vary widely depending upon other circumstances. Based on these reasons, attempts to quantify something such as
a human life can be very difficult and is the most debated aspect of the Ford Pinto case.
There are numerous things which individuals consider "priceless." For instance, most people would claim that they
would not sell their right to vote or their freedom of speech for any amount of money.69 Therefore, to tell someone
that there is a certain price for their life is a preposterous notion. Therefore when taken on a case-by-case basis it is
impossible for an individual to grasp the concept. There are numerous things which individuals consider "priceless."
For instance, most people would claim that they would not sell their right to vote or their freedom of speech for any
amount of money. Moreover, would a parent be able to put a value on the life of a child? Obviously, the notion that,
on an individual basis, a person would take a certain amount of money for their life is ludicrous. To tell someone that
$200,725 is a sufficient trade-off for their life, as argued in the Ford Pinto case, illustrates this point.
Economists, however, do not agree with the "priceless" concept. To them, to trade one unit of anything, even a life,
for an infinite quantity of all other goods is an equally preposterous notion. It can be argued that everything can be
priced or have a value laid upon it. To take this theory down to an individual level reduces the strength of this notion.
In Ford's case, the $200,725 value of a human life was provided to the company by the National Highway Traffic
Safety Administration. The criticism for the value can not be laid upon Ford. The criticism is in using a number, or in
other words using the risk/benefit analysis, in this situation at all. To compound the problem, Ford seemed to blindly
follow the dictated numbers without giving any extra consideration to the fact that it in fact was a human life they
were quantifying.
5. No Wealth Maximization
Related to the lack of "markets" or "prices" for a life is the idea of wealth maximization. The foundation of the
risk/benefit analysis is the theory of economic efficiency and an underlying principle for efficiency is wealth
maximization. If legal decisions are based on efficiency, then nothing will be wasted and the wealth of the country
will be at its maximum.70 However, in order to conduct an efficiency analysis, everything must have a price--
returning to the reoccurring problem. Since the reliance on prices is necessary and not merely contingent, the
system of wealth maximization cannot tell us anything about right conduct where no prices exist. Prices are, in part,
the result of demand and demand is the result of prior entitlements. Consequently, wealth maximization cannot
generate an initial set of entitlements." 71
Along the same lines, efficiency theory assumes that wealth maximization is the goal of law, which is not the case.
The goal of law is the indefinable term. "justice."72 Judges and juries do not attempt to make decisions based on
wealth maximization, they base their decisions on justice. This difference can be seen in the special rules for
rescue, handicapped citizens, and whether the insane are found liable for their torts.73
6. Externalities
Another potential problem with the risk,/benefit approach is the fact that it does not take externalities into effect. This
is a topic with which the law of torts often has trouble. However, it cannot be ignored just because it is hard to
compute.74 Victims are permitted to recover for pain and suffering and the cost/benefit analysis seems to ignore
this point. It is yet another one of the variables that is almost impossible to estimate, much less pinpoint. In addition,
this is another area where the lack of a market is influential. Minimization of social costs differs from the
minimization of private costs precisely because there is an absence of complete markets, and this absence is
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exactly what makes measurements so difficult.75

7. Activity Frequency
If a company or a court were to accurately analyze the costs and benefits of an activity, it must calculate the number
of times the potential victim engages in the activity.76 Taking out the number of times the activity is engaged in
reduces the damages. This calculation is often unobtainable, especially in Ford's case in terms of automobile use.
Professor Polinsky, in his book, An Introduction to Law and Economics explains, "In practice it is usually not feasible
to include the level of participation in the activity has an aspect of the standard of care. For example, it would be
virtually impossible for a court to determine bow many miles a particular person drives each. year since that person
might drive a different car that is shared with other family members or he might drive different cars owned by the
household. If the injurer's level of participation in the activity is omitted from the standard of care, than a negligence
rule generally will lead him to participate in the activity to an excess degree. The reason for this is straightforward, if
the care he exercises meets the standard of care, be will not be liable for any damages. In practice, the negligence
rule is likely to be inefficient for this reason.77
8. Negligence is Predictable: Victims Often Lose
Finally, the cost/benefit analysis and economic efficiency reasoning is argued to be a skewed framework because it
does not take into account the fact that injured parties are at a disadvantage. While the law attempts to place the
plaintiff and defendant on equal ground, it is impossible to accomplish. The plaintiff must prove the negligence, a
difficult task. The negligence-efficiency theory does not account for plaintiffs who cannot afford to bring a lawsuit to
trial or those who cannot establish negligence although it exists. With the adoption of the negligence-efficiency
theory, it is predictable that victims are going to lose more than. They are going to win.78
9. Conclusion
Obviously there are a number of arguments against the use of cost/benefit analysis and the negligence-efficiency
theory. Most of these arguments are separate but related and .revolve around the fact that there are no markets or
prices for human life. It will be forever debated whether it is possible to set a price or value on a life to use in these
calculations and whether this leads to an economically efficient outcome In the case of Grimshaw, the jury was
obviously appalled with Ford's attempt to apply the NHTSA's calculation to risk/benefit standard. Was this a sign of
this standard's inefficiency or was it just a sign of an ineffective jury?
C. For Negligence-Efficiency
For as many arguments as there are against risk/benefit analysis, there are as many claiming it is economically
efficient and therefore the correct standard. In defense of the Ford Motor Company, this standard developed over
many years of caselaw, as detailed earlier in this paper. This negligence standard and the use of risk/benefit
analysis for product liability had been accepted by courts for years before the Pinto controversy. There was no
reason for Ford to believe that this was not the standard that should be used in making its decision. Ford's
automatic decision once it "ran the numbers" confirms the fact that they did not question the idea of using this
analysis. In addition, there are many arguments in support of this sort of analysis other than just the fact that this
was the standard at the time.
1. Risk/benefit Analysis is "Instinctively Done"
In 1972, Judge Richard Posner wrote an article entitled, "A Theory of Negligence," claiming all tort law furthers
economic efficiency. He claims that while judges do not write opinions in terms of welfare economics, there has
always been an effort to decide cases on this basis. "People can apply the principles of economics intuitively--and
thus `do' economics without knowing they are doing it.''79 Therefore, Posner claims that the Carroll Towing decision
was not a novel concept, it just expressed in algebraic terms what court had long been applying.80
2. Maximization of Social Resources
For defendants, such as the Ford Motor Company, who create risks of harm that may be suffered by others, the risk-
benefit standard for negligence provides incentives to take precautions to avoid or minimize risks that can be
avoided more cheaply than the cost of the precautions. By holding a defendant liable for injuries that could have
been avoided at less cost than the accident, a risk-benefit test acts as a deterrent to curb risks that are worth
avoiding, while allowing a defendant to take actions or avoid precautions that are not worth deterring. Deterring
conduct that results in greater accident costs than the benefits of the conduct minimizes the total costs of accidents
and accident precaution. Therefore, it seems this tort "policy" serves the goal of maximizing societal resources.81
To understand the efficiency theory of the risk-benefits analysis, one other point must be explained. In a products
liability design defects case, use of the discussed liability standard requires identification of an alternative design
that would have prevented the accident. One must be able to compare the additional costs created by the
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alternative design, in relation to the existing design, with the costs of the injuries that the alternative design could
prevent.82 In the Pinto case, Ford obviously undertook this analysis, examining the additional $11 cost per unit of
changing the fuel system design.
3. Economic Feasibility of Valuing Non-Economic Items
The decision to use a risk/benefit analysis does not necessarily result in the strict utilitarianism as suggested by
some critics.83 Most all detractors of cost/benefit analysis center their argument around the idea that placing a
value on "non-economic" items, such as a human life, does not lead to economic efficiency. Proponents of the
system claim their risk/benefit analysis is nothing more than what it claims to be--an effort to find some common
measure for things that are not easily comparable, yet must be compared. While this may seem crass--comparing
lives to dollars--some comparison must be made and all the factors in the equation must be brought down to a
common denominator for the comparison to take place. Other instances arise where lives are traded against lives,
just not brought down to the dollar amount that took place in the Ford Pinto case. In the choice between hospital
beds and preventive treatment, lives are traded against lives.84 It is when the analysis is taken down to an
individual level that it becomes problematic.
Economists dispel the related argument just as easily. The idea that if one can quantify "non-economic" items, there
are certain "specially valued" things that cannot be priced. It is true that different individuals value certain things
differently, but simply because an individual deems something has "special value" does not mean that they are
unaffected by economic factors. One may specially value a personal relationship, but how often he calls this person
is influenced by long-distance rates. One may specially value music or watching sporting events, but still can be
affected by the price of records and tickets to the Kennedy Center or the price for watching events on cable or a
ticket to the ball game. 85
4. Efficiency Does Not Equal Immoral
Critics look at risk/benefit analysis in cases such as the Ford Pinto case as a depravity of morality. The idea is that
everyone has the "right" to a safe and healthy workplace, or the "right" to expect product they purchase to be
safe.86 Those who subscribe to this philosophy feel there are some "moral" decisions that must be made no matter
what the fiscal impacts may be or what the risk,/benefit relationship dictates. Proponents of the risk/benefit analysis
counter this "ethical" argument with the idea that these are not either/or decisions being made, but rather gradations
of risk.87 That is, Ford is not sacrificing all safety features of the Pinto, it is a question of to what degree Ford feels
safety features are necessary. It could be argued that the safety question was answered for them prior to the
risk/benefit analysis when Ford's earlier advertising campaign based on safety failed. Decisions involving gradation
of risks are made every day, just not under such strict scrutiny. Obviously, highways would be safer if the speed
were restricted to 25 miles per hour on all roads. However, this must be balanced with the "price" of slower traffic. in
choosing 55 or 65 as the speed limit, we are sacrificing lives to make travel quicker and less costly. Therefore, the
Ford Motor Company is not morally void for choosing between levels of safety. Auto manufacturers do this every
dav.
5. No Standard for Using an "Ethical Balancing"
All of the arguments against the use of risk/benefit analysis seem to center around the "ethical argument." Instead of
a monetary system, sire should adopt an ethical system that balances conflicts between certain unspecified duties
and rights according to "deliberate reflection.88 While placing dollar amounts on these items is admittedly arbitrary,
the "ethical" method would open a much larger debate. Who would be in charge of this ethical reflecting and on
whose behalf would these decisions be made? There would be no clear limits for the actions of regulatory agencies.
What public values would rise above these vague guidelines? Finding or arriving at a consensus for this ethical
standard is virtually impossible.
6. Conclusion
In conclusion, all of the arguments against Judge Posner's negligence-efficiency argument center around valuing
human life. Is it possible to set a price for all things, especially a human life? Is it ethically correct to attempt to do
such a thing? Should a company be allowed to use this standard to determine whether to "upgrade" an automobile.
The answer to all of these questions is yes. The use of the risk/benefit analysis maximizes overall economic value
and general welfare. In fact, these choices are subconsciously made by individuals, companies and governmental
agencies on an everyday basis. Judge Posner argues this standard was used long before Judge Learned Hand first
expressed it in algebraic terms in Carroll Towing. While criticizing the numbers or values used by the Ford Motor
Company in the risk/benefit analysis may be valid, the use of the risk/benefit analysis itself cannot be questioned.
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V1I. Conclusion
Through years of case law, the negligence and products liability standard has evolved. Many will argue that courts
have "subconsciously" used cost/benefit analysis for many decades, especially with the old "reasonable man"
standard. However, Judge Hand finally established this standard in Carroll Towing, explicit acknowledging the "BPL"
formula. Judge Posner gave the standard a ringing endorsement in an article in 1972, defending it on economic
efficiency grounds. Since that time it has been the source of hot debate.
While not absolutely perfect, the risk/benefit standard for negligence advances overall economic value and welfare,
is economically efficient, and therefore is the correct standard to apply (or at least the best option). Criticism of the
standard almost always occurs when looking at the standard on an individual case-by-case basis. Critics and
laypeople have a difficulty valuing non-economic entities as is required by the formula. Approaching it in this
manner, it seems insulting to place a monetary value on a life. This is where the efficiency standard ran into trouble
in the Ford Pinto case. One must realize these "valuations" and determinations are part of everyday public policy. In
determining safety and environmental standards, a choice must be made as to what level these areas should be
regulated.
The Ford Motor Company was not wrong in applying this risk/benefit standard. While the numbers the company
used in its analysis may be questioned, the decision to employ the framework which resulted in the decision not to
redesign the fuel system shouldn't be. Ford ran into the; trouble of taking this framework and having to justify it on a
individual case basis, as a result of the lawsuits. In addition, the Ford Motor Company was an attractive defendant to
find liable. The jury's disgust with the deep-pocketed defendant and the troubling value of a life concept was
evidenced by the ridiculous punitive damage award initially granted to the plaintiff Obviously, one cannot assume a
jury will understand the economic efficiency of the risk/benefit analysis. Even if they do, who knows what they will
decide anyway? This fact raises the question--If the Hand risk/benefit formula is truly used to decide negligence
cases as Judge Posner claims, why isn't the jury instructed about it.89
In conclusion, this framework is economically efficient and the proper one to apply. However, companies beware.
The result of the Ford Pinto case indicate there is a belief held by most of the public that it is wrong for a corporation
to make decisions which may sacrifice the lives of its customers in order to reduce the company's cost or increase
its profits.90 With this widespread attitude among those who make up juries, trial lawyers would not be wise; to
defend cases on the economic analysis of why it was not efficient to redesign a faulty model. Instead, trial lawyers
argue that the alternative design compromises the product's function or creates different risks in the product, but not
that the costs of the alternative design outweigh the injury or death toll that may be avoided.91 These options did
not seem plausible in Ford's case, which spelled trouble. Therefore, while it may be valid economic efficiency
reasoning, the Ford Motor Company and others are forced to think twice before utilizing a risk/benefit analysis in
their decision making process.

Similarly, in Lehigh Bridge v. Lehigh Coal & Navig. Co., 4 Rawle 8 (Pa. 1833), the court stated, "The defendant had
the ... right to erect the damn at the particular place ... and if chargeable with no want of attention to its probable
effect, is not answerable for consequences which it was impossible to foresee and prevent. Where a loss happens
exclusively from an act of Providence, it will not be pretended that it out to be borne by him whose superstructure
was made the immediate instrument of it.